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V 


ECONOMICS 


BY 

FRANK TRACY CARLTON 

PROFESSOR OF ECONOMICS 
CASE SCHOOL OF APPLIED SCIENCE 
CLEVELAND, OHIO 


D. C. HEATH AND COMPANY 


BOSTON 

ATLANTA 

NEW YORK 

SAN FRANCISCO 

LONDON 

CHICAGO 

DALLAS 


2L, 



hlBni 

-5 

• Cza 

dopy 2~ 


Copyright, 1931, 

By D. C. heath AND COMPANY^ 

No part of the material covered by this copyright 
may be reproduced in any form without written 
permission of the publisher. 

3 E 1 



PRINTED IN THE UNITED STATES OF AMERICA 

A. 

■JUN -8 !93H 

a— 

©CIA 37773 t) ' 


PREFACE 


The main function of a college training is not to acquire 
facts or formulae but to give the members of the college com¬ 
munity the ability to analyze a proposition, to develop initiative 
when facing a new situation, to use brain power. It is the pur¬ 
pose of this volume, intended as a short text for college students, 
to offer the fundamentals in economics with a hope that it may 
aid its readers in meeting the business problems which will 
sooner or later confront nearly all college graduates. 

This textbook is intended to cover a one-semester course in 
economics. Abstract theoretical discussion has been reduced 
to a minimum. The references and the questions at the end of 
each chapter are only suggestive. 

F. T. C. 

Cleveland, Ohio 
January, 1931 ( 


iii 


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CONTENTS 


PAGE 

Peefacb .. . , . iii 

CHAPTER 

I. What Is Economics? . 3 

What Are We to Study? A Useful Art. 

II. Evolution of Modern Industry. 8 

Methods of Getting a Living. Growth of the Social Point 
of View. 

III. Characteristics of Modern Industry ... 16 

The Tools of the Business World. Men and Machines. 

Mass Production. 

IV. Production. 25 

What Is Production? Factors in Production. Increased 
Productivity. Incentives. Inventions. Research. Abihty 
of Individuals. Teamwork. Importance of Management. 
Differences in Productivity. Pecuniary Productivity. Wel¬ 
fare and Profits. 

V. Causes of Increased Productivity .... 39 

Industrial Civilization Rests upon Science, Power, and 
Machinery. Characteristics of Modern Production Methods. 
Obstacles to Increased Productivity. Benefits of Recent In¬ 
dustrial Progress. 

VI. New Problems in Business. 49 

The Big Social Problem. Mechanical Science Has Out¬ 
run Social Science. Old versus New Ideals in Business. A High 
Degree of Continuity. The New Class of Business Managers. 
Purpose in Industry. Government in Industry. 

VII. The Utilization of Commodities. 60 

Production and Consumption. The Art of Purchasing. 
Waste. Responsibihty for Waste in Industry. The Cost 
of Living. A Decent Standard of Living. Welfare and 
Income. 

VIII. Value and Price. 75 

Exchange Value and Price. Normal Price. Supply and 
Demapd. Competition. Monopoly. 

Y 




vi 


CONTENTS 


CHAPTER page 

IX. Marketing. 86 

The Job of the Middleman. Marketing Functions. 

Cost of Selling Goods. Advertising and Salesmanship. 
Recent Changes in Marketing. Cooperation in Marketing. 

X. Division of the Products of Industry . . 99 

Division of the Products of Production. Rent and 

Interest. Diminishing Returns. Capital and Interest. 
Profits. Opportunity Return. 

XL Wages. 108 

The Sale of Labor Power. Explanation of Wage Rates. 
Individual and Collective Bargaining. How May Wages 
Be Raised? 

XII. Wealth and Income. 121 

Personal Distribution of Wealth. National and In¬ 
dividual Incomes. Justice in Inequality. 

XIII. Starting the Business and Locating the Plant 125 

The Initial Problem. Local Grouping of Industrial 
Establishments. Locating the Industry. Expansion. 
Relocating an Industry. Large-City Sites. The Sub¬ 
urban Site. The Small-Town Site. Changing Conditions. 

XIV. Planning for the Building and Equipment . 134 

The Plant Is a Machine. Financial Elements. Shop 
Transportation. Lighting, Heating, and Ventilating. 

XV. Financing Industry. 138 

The Single Enterpriser. Partnership. The Corpora¬ 
tion. Long-Time Financing. Bonds. Stock. The Book¬ 
keeping of a Corporation. Over-Expansion. Tendencies 
in the Control of Corporations. The Use of the Surplus 
of a Corporation. 

XVI. Large-Scale Business. 152 

The Small Establishment. The Sphere of Large- 
Scale Industry. Forms of Combination. Development 
of Large-Scale Business. Antitrust Legislation. Unfair 
Competition. 

XVII. Money and Credit. 162 

What Is Money? The Functions of Money. Types 
of Money in the United States. Credit. Price Fluctua¬ 
tions. Effects of Price Fluctuations. A Stabilized 
Currency. 



CONTENTS vii 

CHAPTER PAGE 

XVIII. Banking. 169 


The Function of a Commercial Bank. The Origin of 
Banking. The Balance Sheet of a Bank. The Bank’s 
Business. Credit Instruments. The National Banking 
System. The Federal Reserve Banking Plan. Bank 
Clearings. Savings Banks. The Trust Company. 
Federal Land Banks. 

XIX. Investments. 180 

The Field of Investment. Investment and Specu¬ 
lation. The Tests of the Good Investment. Investment 
Banking. Investment Trusts. Hints to Investors. The 
Stock Market. 

XX. Transportation. 188 

Transportation and Progress. Growth and Importance 
of the American Railway Industry. Rate-Making Prob¬ 
lems. Classification. Personal Discrimination. Place 
Discrimination. Regulation. Water Transportation. 

The Automobile and Hard-surfaced Roads. Transpor¬ 
tation by Air. Future of Railway Transportation. 

XXI. Public Utilities 204 

What Are Public Utilities? Growth of Public Utilities 
in the United States. Valuation and Rates. Pubhc 
Ownership and Operation. 

XXII. International Trade. 215 

Principles and Practices in International Trade. The 
International Balance Sheet. International Debts. 

XXIII. The Tariff. 224 

Free Trade, Tariff for Revenue Only, and a Protective 
Tariff. Arguments for Free Trade. The Infant Industry 
Argument for a Protective Tariff. The Home Market 
Argument. The Wages Argument. The War Argument. 
Equalization of Cost. Why Does the Tariff Controversy 
Continue? History of American Tariff Legislation. 

Tariff Making. 

XXIV. Business Cycles. 235 

Science and Business. Rhythms in Industry. What Is 
the Business Cycle? Effects of Business Cycles. Causes 
of Business Cycles. Business Forecasting. Methods of 
Stabilization. 

XXV. Risk-Taking. 246 

All Business Enterprises Take Risks. Speculation. 

The Wage Worker Is a Risk-Taker. Reduction of Risks. 
Transfer of Risks. Hedging. Insurance. 






Vlll 


CONTENTS 


CHAPTER PAGE 

XXVI. Population and the Industrial Personnel. 257 
The Malthusian Law of Population. Growth of Popu¬ 
lation. Growth of Cities. Immigration. The Restriction 
of Immigration. Is the Restriction of Immigration an 
International or a Domestic Problem? The Nation’s 
Working Force. The Migratory Worker. 

XXVII. Organized Labor and Employee Representation 269 
Organization. Early Labor Conditions. Early Labor 
Organizations in the United States. Labor Organizations. 

The Knights of Labor. The American Federation of 
Labor. The Industrial Workers of the World. Demands 
and Methods of Labor Organizations. Employers’ Asso¬ 
ciations. Employee Representation. History of the 
Employee-Representation Movement in the United 
States. Employee Representation and the Union. Oppo¬ 
sition to Shop Committees. The Outlook for American 
Labor Organizations. 

XXVIII. Labor Management. 291 

Ignorance in Labor Management Costly. The Field 
of Personnel Administration. The Road Leading toward 
Industrial Peace. Common Interests. The Functions of 
the Personnel Department. Treatment of Workers. 

XXIX. Steady Employment. 302 

Unemployment Is a Community Problem. Statistics 
of Employment. The Effect of Unemployment upon the 
Worker and His Family. Effects of Unemployment upK)n 
Purchasing Power. Technological Unemployment. Plans 
for StabiUzing Employment. Labor Maintenance. 

XXX. The Law in Industrial Relations . . .317 

The Function of Government in Industry. Legal 
Complications. Factory Legislation. Social Insurance. 
Workingmen’s Compensation. Health Insurance. Old- 
Age Pensions. Unemployment Insurance. Attitude of 
Organized Labor toward Labor Legislation. 

XXXI. Public Expenditures. 328 

Public Finance. The Increasing Functions of Govern¬ 
ment. Growth of Governmental Expenditures. Purpose of 
Public Expenditures. Pubhc Debts. 

XXXII. Public Finance. 336 

Sources of Public Revenue. Definitions. Justice in 
Taxation. Tests of a Good System of Taxation. The 
General Property Tax. The Income Tax. The Inheri¬ 
tance Tax. Excise Duties. Tariff Duties. The Poll Tax. 
Corporation Taxes. The Federal System of Taxation. 

State and Local Taxation. The Burden of Taxation, 



CONTENTS 


ix 


CHAPTER PAGE 

XXXIII. Pkoposals for Economic Reform .... 348 
Reform Movements. A Chart of Reform Movements. 
Anarchism. Syndicalism. The Single Tax. Liberalism. 
Conservatism. Progressivism. A Program for Industrial 
Coordination. State Socialism. Guild Socialism. Marxian 
Sociahsm. Utopian Sociahsm. Bolshevism. Communism. 

XXXIV. The Present Trend. 360 

Adaptation to New Conditions. Changes in Govern¬ 
mental Structure. Labor and the New Day. The Big 
Problems Confronting Industry. 


Index 


369 




v 







ECONOMICS 







CHAPTER I 


WHAT IS ECONOMICS? 

What Are We to Study? What are we to examine, analyze, 
study? What is the sort of phenomena with which we are to 
deal? Men and women are all creatures of wants, of desires, of 
aspirations, which are satisfied, or which we attempt to satisfy, 
through various sorts of activity—work and play. In economics, 
we deal with man and his multitudinous and varied wants, par¬ 
ticularly his material wants, and the methods of satisfying those 
wants, whether good, bad, or indifferent, whether intense or 
weak, whether fairly permanent or ephemeral. Our attention is 
also directed toward the tools or instruments, such as money 
and credit, farms and factories, utilized in the process of ob¬ 
taining commodities and services which enable men, women, 
and children to satisfy their wants. Economics investigates 
the activities of human beings which lead to the production of 
goods and services, and also those which are concerned with 
the utilization or consumption of those goods and services. 

Neither Robinson Crusoe nor the American pioneer had a 
complicated science or art of economics. In modern complex 
society, however, the satisfaction of human wants involves 
many complex problems. We are concerned not with one indi¬ 
vidual or one family but with a multitude of interacting persons 
who compete and cooperate in a bewildering variety of ways. 
Economics is now clearly a social science, but it is not a science 
in which the theorems can be proven mathematically. There 
are too many variables. Economics bristles with controverted 
points; and points of view change with modifications in the 
business world. Old rights and principles which looked eternal 
and fundamental in the days of handwork and of small-scale 
industry, appear antique and outgrown in the epoch of big 
business, networks of railways, and world markets. The student 
of economics should look, or at least try to look, on both sides 

3 


4 


ECONOMICS 


of a question, and then draw his own conclusions. In many 
other subjects, such as language, ancient history, and chemis¬ 
try, we have no preconceived notions or secondhand theories. 
All is new to us. On the other hand, in economics, the everyday 
industrial and economic life of the times in which we are living 
is considered. All of us possess our preconceptions and our 
class or interest bias when we approach various topics in eco¬ 
nomics. This fact adds to the fascination as well as to the diffi¬ 
culties in the study of economics. 

We are so accustomed to obtaining certain goods and services 
when and where we want those articles that we forget to visual¬ 
ize the great underlying piece of social mechanism, the business 
world. Our economic or industrial organization, the business 
world, is in actuality a great tool or machine operated for the 
purpose of satisfying the wants of the great mass of men and 
women. It is the ambitious purpose of economics to study this 
giant machine, its parts, interrelationships, functions, and 
wastes, and the methods of improving its operation and of 
increasing its output. The problem of economics is to investi¬ 
gate and to attempt to understand the forces which cause men 
to work hard day after day, year in and year out, and which 
develop an organization that furnishes food, clothing, shelter, 
and comforts for multitudes. The business world does not 
necessarily operate in a haphazard and unsystematic manner; 
and, if the business mechanism breaks down at any point, we 
immediately feel the evil effects in scarcity and want. Effects 
follow causes in the sphere of social and economic relations as 
surely and as definitely as in the physical world. The problem 
is complex, but the solution is urgently needed. 

In economics, the material wants are stressed. Business is 
sometimes held up to view as a great mechanism for the purpose 
of producing more and more goods. Produce in order to pro¬ 
duce more. But, from time to time, the reminder should be 
given that the end and aim of life is not merely the production 
and utilization of multitudinous commodities and services— 
automobiles, bread, jewelry, clothing, preaching, shoe blacking, 
healing, garbage collecting, and so on through a long and ever- 
lengthening list. What is produced and how it is produced are 


WHAT IS ECONOMICS? 


5 


of greater importance than the indiscriminate demand for more 
and more production. The practical is not the sum total of 
life. Although difficult to define and outside the direct field of 
our study, there are esthetic, cultural, or spiritual values and 
satisfactions which are deeper, richer, and more satisfying than 
the urge to conspicuous and extravagant utilization of material 
goods and personal services. In the words of A. S. Johnson, 
‘‘We cannot have the good things of life—leisure, a friendly 
attitude toward our fellows and a sense of well-being within 
ourselves, the pursuit of knowledge and the cultivation of art— 
unless we take our souls out of the economic process. We shall 
have to work in order to live, but when we have secured what 
is essential to living, we must learn to stop, and turn to other 
activities.” We need to develop an “active appreciation” of 
leisure, and the capacity to use such time decently. Business 
for the sake of business is a futile and overworked slogan. In 
the words of Glenn Frank, “to man as an intellectual and social 
being, the three most important things in life are education, 
religion, and politics.” 

Formal definitions of economics offered at the outset are not 
satisfying. They do little to dispel the haze. It may, however, 
not be inappropriate to present two definitions of our subject. 
According to Professor Thorp, economics “is the study of the 
processes whereby society attempts to satisfy the wants of its 
members. From the point of view of the individual, it is the 
study of why and how he gets as much as he does and some 
other person gets more.” Professor Carver insists that economics 
has to do with man’s escape from want. It is concerned with 
the technique of production, exchange, and utihzation of goods 
and services, by means of which the people of the world are 
being lifted out of a condition of great scarcity and poverty 
into one of relative plenty and greater comfort, into a condition 
in which unessential as well as essential wants may be satisfied. 

Until recently, writers on economics have held the view that 
wages, prosperity, business cycles, and other phenomena of 
the economic world were largely independent of human action. 
Fluctuations in the economic realm were automatic or certain 
to happen. Now, we are coming to believe, and to act upon the 


6 


ECONOMICS 


belief, that depressions can be in part eliminated, that the 
business cycle can be, in a large measure, smoothed out, that 
wages are subject to modification by union and managerial 
pressure, and that it is possible to direct within limits other 
forces operating in the economic worldo This new point of view 
calls for a scientific study of these forces. Economics is a science 
and an art. The students of economics are adopting the scientific 
attitude; they are concerned with cause and effect; they are 
searching for the truth in the maze of conflicting forces and 
interests. The purpose of economics is twofold: (1) the im¬ 
provement of human life and the reduction of poverty, and 
(2) aiding the individual in getting a living. 

A Useful Art. In this book, an attempt is made to present 
economics as “a useful art.’^ It may aid the engineer and the 
business man in discerning the forces which make the business 
world move. It may be of assistance in analyzing the way in 
which the world is getting its living, and the means of lifting 
the level of human comfort and enjoyment. Engineers are 
being admitted in increasing numbers into the inner councils 
of business. They are no longer mere outsiders and paid ad¬ 
visers; they are taking the steering wheel. We are living in a 
kaleidoscopic world. Business men and engineers are finding 
new and better ways of doing things. The well-informed person 
hhs marked advantages in dealing with new and strange situa¬ 
tions. The engineer and the business man should look for cause 
and effect as diligently and intelligently in economics as in 
physics or chemistry. The physical world does not possess a 
monopoly on action and reaction. 

Much of our economics, political ideas, and philosophical 
concepts is based on a rural environment, personal independ¬ 
ence, small production by means of hand tools, and the fierce 
competition of small business units. Within two generations, 
science and the machine have transformed the Western World. 
The majority of the population live in cities, each of us is very 
dependent upon the efficient functioning of other workers, 
interdependence has in a large measure replaced independence, 
the machine and science have multiplied productivity and 
helped to banish extreme scarcity. The old virtues of frugality 


WHAT IS ECONOMICS? 


7 


and of personal liberty look faded and out of date. Competition 
long held to be the automatic and beneficent power which 
made for economic and social good is now looked upon as a 
fomenter of anarchy in business and is being modified and dis¬ 
placed by means of mergers and regulation. Economics should 
today be reinterpreted in the light of a new industrial era— 
a difficult matter because of lingering traditions coming from 
the past and because of social inertia. Ideas, as well as ma¬ 
chines, suffer from obsolescence. We live in a world distorted 
by tradition and custom, and filled with social institutions which 
are modified or re-formed slowly. 

Americans are statistically minded. The “apparatus of infor¬ 
mation” is well developed, and masses of statistical data are 
available; but the primary difficulty is connected with faulty 
interpretation of the facts and figures, tables and charts, which 
the business man, the engineer, and the statistician now have 
available. A brief excursion into the realm of economics should 
not be a mere fact-finding quest; it should give a background 
for the thoughtful analysis and understanding of the forces 
and tendencies manifested in the changing industrial world of 
the present. The purpose should be primarily that of getting 
understanding. 

Questions , 

1. Contrast city life of today with the life of the pioneer. 

2. Classify ways of getting a living. 

3. Give examples of social inertia. Of industrial inertia. 

References 

Edie, L. D., Economics: Principles and Problems, Ch. 1. 

Soule, George, The Useful Art of Economics, Ch. 1. 

Thorp, W. L., Economic Institutions, Pt. 1. 


CHAPTER II 


EVOLUTION OF MODERN INDUSTRY 

Methods of Getting a Living. The business of getting a living 
is as old as the human race; but the methods of getting a living 
have changed greatly from time to time as men have passed out 
of the primitive hunting and fishing stage into the period in 
which agriculture was practiced by isolated groups using sim¬ 
ple implements, and then into an era in which towns began to 
appear and craftsmen devoted their attention to special forms 
of work—an era in which exchange and local markets became 
common. Finally, the more advanced industrial nations passed 
into the machine, factory, and power epoch characterized by 
greater division of labor, wider markets, railways, and much 
economic interdependence. Industries passed into the factory 
stage at different times. Indeed some, like the arts and crafts 
and shoe repairing, have not as yet reached the factory stage. 
Recently, in the more advanced industrial nations of which the 
United States is the best example, mass or standardized produc¬ 
tion is becoming typical of many industries. Mass production 
is marked by extreme subdivision of labor, by the great increase 
in use of automatic and semi-automatic machinery, by team¬ 
work, by the application of scientific methods, by the separation 
of ownership from management, by the demand for regularity, 
repetition, and standardization, and by the rise of human en¬ 
gineering. 

Changes in methods of getting a living have vital effects upon 
government, upon morals, upon home life, and upon human 
relationships in general. Social and political changes as recorded 
in the annals of history are very closely connected with modifi¬ 
cations in the means of doing the world’s work. Today’s civili¬ 
zation is literally built upon the past. The opportunities and 
comforts of today rest upon the foundations laid by generations 
of long-forgotten men and women who had their own problems, 

8 


EVOLUTION OF MODERN INDUSTRY 


9 


difficulties, fears, loves, and triumphs. Many civilizations have 
risen and disappeared in the oblivion of antiquity. Our own 
civilization differs peculiarly from those of the past in that it 
is primarily industrial, and also in that it is productive to a 
degree hitherto unknown. The present, as compared with past 
epochs, is one of relative plenty. The revolutionary advance 
in the arts of communication and of direct production has 
brought the peoples of the world out of isolation and scarcity, 
and has confronted them with new economic, political, and 
social problems which past experience helps but little to 
solve. 

The point of view of a man and his personal characteristics 
are in a considerable degree the resultants of the occupation he 
follows, the way in which he gets a living. The roving, hunting, 
and fighting tribesman of the primitive world was very differ¬ 
ent from the land-cultivating, stay-at-home farmer of today. 
The frontiersman of early American life had many character¬ 
istics not fostered by the routine and repetitive work of mass 
production as found in large manufacturing plants. The primi¬ 
tive man and the pioneer knew little of routine, of regularity, of 
being a slave to the clock. Our ages-distant ancestors and the 
frontiersman laid much stress upon luck, magic, and guesswork. 
The primitive man hunted and fought at irregular intervals. He 
took little heed of the morrow; work was not on his short list of 
virtues. Uncertainty, the alternation of famine and plenty, 
leisure today and strenuous exertion tomorrow, ennui of idle¬ 
ness today and tomorrow the climax of a thrilling hunt, were 
typical of the long ages of the primitive world in which the great 
fundamental characteristics of human nature were molded. The 
primitive man constantly faced the world of nature. On the 
other hand, relative certainty, the doing of the same things 
today and tomorrow that were done on many yesterdays, the 
humdrum level of a reasonable standard of living—unless the 
job is lost—are today's portion. The great uncertainties of today 
in the normal times of peace are the prosaic and unheroic ones 
of unemployment and sickness. The home and working environ¬ 
ments of the city and shop worker are man-made—paved streets, 
rented homes, municipal water and fighting, commercialized 


10 


ECONOMICS 


amusements, the artificial thrill of the melodrama on stage and 
movie screen. The discipline of the machine age runs counter to 
deep-seated impulses and social habits. 

Only in recent years, after much experience with the machine, 
are science, reasoning, and careful planning being widely used 
in the economic world. In the new industrial era of mass pro¬ 
duction emphasis is being placed upon regularity, cost account¬ 
ing, research, teamwork, low labor turnover, and the careful 
selection of a labor force. As has been indicated, there have 
been many and diverse types of industrial-work-organizations. 
Indeed, because of this diversity, it may easily be concluded 
that there is no “right” industrial organization for all men, 
times, and places. The industrial methods of the pre-Civil War 
period or of the pre-World War era are now out of date and 
inefficient for the operation of today’s equipment. And today’s 
methods and programs may be expected to be inadequate and 
out of date in 1950. 

Growth of the Social Point of View. The primitive, ancient, 
feudal, and pioneer stages of human life and activity were 
characterized by isolation and a large degree of economic in¬ 
dependence. The manorial group of the feudal period produced 
practically all that it consumed. Little was exchanged for com¬ 
modities produced by outsiders. The American pioneer was 
likewise in a large degree dependent upon the efforts of himself 
and family for food, clothing, and shelter. Economic life was 
simple. Exchange was infrequent and abnormal. In case of an 
exchange, goods were usually given directly for goods—butter, 
corn, or skins for sugar, axes, or grindstones. On the other hand, 
since the development of the factory system, and especially in 
recent decades, a high degree of specialization and of exchange 
of goods and services has been attained; exchange and economic 
interdependence are now fundamental and normal. The worker 
helps as one of a large group to produce an article which may be 
ultimately sold to some one on the other side of the continent 
or world. He buys with his money the goods and services pro¬ 
duced by others whom he may not know. The business world 
of our time is a great market for exchanging goods and services. 
In all the earlier epochs of the world’s history goods were utilized 


EVOLUTION OF MODERN INDUSTRY 


11 


chiefly by those who produced them. Today the producers of 
particular commodities rarely consume these articles. Goods 
are primarily made for sale, not for ^'home” consumption. 
Price has become of prime importance in the business world. 
The miner mines coal; he exchanges his specialized services for 
a tool of exchange, money in some form, and with this tool he 
buys food, clothing, shelter, and miscellaneous goods and serv¬ 
ices. The physician heals the sick for a fee in terms of money, 
and with the money buys his necessities, comforts, and luxuries, 
and makes his investments. The manufacturer directs a great 
enterprise and his profits appear in terms of money. It is this 
very new and very different world of increasing complexity and 
productivity which is to be studied. Many of its problems are 
quite different from those confronting the primitive man, the 
pioneer, or even the pre-World War world. 

Today, in every American city and village, the full coal bin and 
the food for three meals daily are family problems plus; they are 
in reality nation-wide problems. Modern industrial society can 
only be kept going in case each type of worker—farmer, miner, 
railway man, truck driver, clerk, fireman, technical expert, and 
so on—does his part in an efficient manner and on time. If the 
workers themselves or the technical experts become convinced 
that they are being exploited in the interests of others, if as 
a consequence they become sullen, resentful, and suspicious, 
serious trouble is just ahead. The increasing interdependence 
of the members of a community or of a nation is a marked 
phenomenon of recent decades. Man in an industrial society is 
no longer an independent economic unit. The transformation 
of a pioneer economy into an industrial and exchange economy 
spells not only startling changes in methods of getting a living 
but also in social relationships and concepts of individual rights 
and duties toward fellowmen. 

There is probably no more of ''slackerism,'' the following of 
the famous line of least resistance and general evasion of duty, 
in recent years than in earlier generations and centuries; but the 
intricacy and interdependence of modern industrial life make it 
more easily noticed and more dangerous. What one does now 
affects much more vitally the welfare of others outside one's 


12 


ECONOMICS 


immediate family circle than in preceding years. The laziness, 
^‘slackerism,^^ or inefficiency of the pioneer affected others but 
little. Today inefficiency, carelessness, and waste are social prob¬ 
lems. An injury to one is indeed an injury to all. We are truly 
becoming our neighbor’s keeper; and our neighbor’s work or 
waste is of importance to us. 

A specific example will show clearly the basic economic prob¬ 
lems thrust upon us by interdependence. In our cities milk is 
practically a necessity. Ordinarily it appears regularly at the 
breakfast table of the city dweller. Why? How? If we attempt 
to answer these two questions, we shall directly or indirectly 
touch upon the aims and activities of multitudes of workers 
living and dead—farmers, truck drivers, railway workers, manu¬ 
facturers, glass workers, miners, bankers, merchants, delivery 
men, physicians, lawyers, labor leaders, business managers, 
policemen, technical experts, and so on. Then we shall in turn 
meet questions of price, of wages, of profits, of competition, of 
monopoly. Why does milk cost the consumer so many cents 
per quart? How much goes to the farmer? Why not more? Or 
less? What is a fair division of the consumer’s money among 
farmers, milk-wagon drivers, railways, and milk companies? 
How do you know it is or is not divided fairly? Does any one 
know? If a group is not satisfied with its share, has it the right 
to prevent the milk from reaching the city consumer? Has the 
community the right to insist that the milk provided and sold 
shall be clean and pure? Why? These and many other ques¬ 
tions relating to the production and sale of milk, or of any other 
commodity or service, furnish the raw material for the study 
of economics. We cannot expect complete and final solutions 
of these problems, but out of such studies may come the back¬ 
ground for the intelligent discussion and tentative solution of 
economic problems. 

Business is rapidly becoming a public function; it is no longer 
to be considered solely a private matter. Americans, and Euro¬ 
peans in even a larger degree, are accepting the idea that the 
owner of a business can no longer operate it exactly as he pleases. 
Private property rights are being narrowed in several directions. 
The right of the investor to act as the sole director of industry 


EVOLUTION OF MODERN INDUSTRY 


13 


is being questioned. The workers, technical, skilled, and un¬ 
skilled, are demanding with increasing vigor a voice in industrial 
management. The age of isolation, localism, and group inde¬ 
pendence is now a matter of history in a great industrial coun¬ 
try such as the United States. Several centuries ago the feud 
and the duel began seriously to interfere with the welfare and 
business affairs of persons and groups not directly concerned in 
those quarrels. Presently, public opinion began to deprecate 
the use of such crude and violent methods of settling dis¬ 
putes. As a last resort for those who were unable or unwilling 
amicably to settle their own disputes, the law courts were 
invented. Disputants were coerced into having their quarrels 
adjudicated by the court instead of repairing to the ancient 
practice of private warfare. 

Modern complex industrial society may logically be com¬ 
pared to a delicate and intricate animal organism. To stop the 
functioning of a key industry may entail disastrous results 
similar to those of cutting the arteries of a human being. Wars, 
international and industrial, may easily ruin modern industrial 
civilization and usher in a new Dark Age. Civilization is a 
guarded area of relative peace in which teamwork is essential. 
If industrial friction, sabotage, mutual suspicion in industry, 
autocratic and arbitrary methods on the part of employers, and 
increasing emphasis upon class consciousness continue and de¬ 
velop in intensity and scope, a social and industrial breakdown 
is ahead. Men must live and work together peacefully or civili¬ 
zation will inevitably revert to savagery. There is needed today 
a sense of common interests and of common perils. 

The steadily mounting importance of regularity, certainty, 
and efficiency in industrial functioning can be pictured readily 
by hastily comparing the old well with its famous moss-covered 
bucket and the city water-pumping plant, the tallow candle of 
the pioneer and the electric power station with its radiating 
network of wires, the ox-cart and the steam locomotive with 
its accompanying freight cars or passenger coaches, the butcher¬ 
ing day of the farmer and the packing houses of Chicago, the 
village blacksmith and the United States Steel Corporation. 
In each case the vivid contrast is between a small, independent. 


14 


ECONOMICS 


and socially unimportant unit and a large unit upon the effi¬ 
cient functioning of which multitudes of widely separated 
human beings are dependent. 

In the metropolitan area of Greater New York dwell ten 
millions of people. This great aggregation of men, women, and 
children is provisioned ahead only for about three days. Much 
of its perishable food, including some of its milk supply, is 
brought from Ohio on the west and Florida on the south. Shut 
down for any reason a city water plant, a transcontinental 
railway, or the coal mines of the nation, and very soon great 
groups of individuals and families suffer from hunger, cold, or 
thirst. An exhibit in the Smithsonian Institution at Washing¬ 
ton indicates that the coffee which the American family uses 
is transported on the average 5,500 miles; oranges, 2,500 miles; 
oatmeal, 1,800 miles; lamb chops, 1,700 miles; sugar, 1,500 
miles; and butter, 700 miles. The housewife buys each day 
her supplies from the grocer, probably a link in a chain of stores, 
located around the corner. How different from the situation 
which confronted the American pioneer! 

During the eras in which primitive man lived, during the 
Middle Ages, in Colonial and Pioneer America, changes in 
methods of living and in getting a living came slowly. A genera¬ 
tion saw little modification. Recently, and especially in the 
last generation, extraordinary changes have taken place. In¬ 
dustrial progress has been speeded up as never before in the 
world’s history. The general use of the telephone, the automo¬ 
bile and good roads, scientific management, mass production 
and distribution, long-distance transmission of electricity, the 
use of concrete, the apartment house, the vacation habit, the 
moving picture, the radio, and the airship are tokens of changes 
which are revolutionizing within a generation our working, liv¬ 
ing, and leisure life. The inventors of the arc and the incan¬ 
descent electric light were both living in 1928; but more prog¬ 
ress has been made in lighting in fifty years than during a 
thousand years preceding 1880. The student may easily work 
out parallels in many other lines of development. Our next task 
is to analyze the production methods of today, to discuss their 
effects upon the lives of men and women, and to discern the 


EVOLUTION OF MODERN INDUSTRY 


15 


probable lines along which national productivity may be fur¬ 
ther improved. 

Questions 

1. Give illustrations of the effect of new methods of getting a living 
upon home life and upon morals. 

2. Give an example tending to show that the occupation of a man af¬ 
fects his point of view. 

3. Contrast the environment of the primitive man with that of the 
worker of today. 

4. Why is punctuality so important in the business world? 

5. How would your home city or town be affected by the sudden stop¬ 
page of a “key” industry? 

References 

Beard, Charles A., Whither Mankind. 

Marshall, L. C., Industrial Society, Pt. I. 

Randall, John H., Our Changing Civilization. 

Recent Economic Changes, issued by the National Bureau of Economic 
Research. 

Tugwell, Rexford G., and others, American Economic Life, 


CHAPTER III 


CHARACTERISTICS OF MODERN INDUSTRY 

The Tools of the Business World. Modern business is a 
process of specialized production and exchange. In contrasting 
modern complex industrial economy with the earlier and simpler 
ways in which men and women satisfied their wants, a multitude 
of significant features may be found, but three—power-driven 
machinery, transportation facilities, and money—seem to be 
basic. These are the great tools of the business world of today. 
Power-driven machinery has transformed the typical industrial 
worker from a tool-user into a highly specialized machine-tender 
or operator. Manufactured goods are no longer ‘‘made by 
hand.” The average industrial worker has little opportunity to 
exercise initiative; his motions are semi-automatic and repetitive. 
His work is monotonous. Factories in which large groups are 
employed are clustered in and about great cities and industrial 
or mill towns. A comparatively small group of highly skilled 
planners, managers, and cost accountants have direct control 
and oversight of the factory. However, there are still many 
industrial fields in which the machine process has not as yet 
reached a high state of development—for example, household 
work and coal mining. Marketing is by no means as highly 
specialized as manufacturing. 

In the last two or three decades the machine and power have 
attained a new and dominant position in the world of affairs. 
Mass or standardized production is now typical of important 
lines of manufacturing, merchandising, transportation, and 
mining. With the increasing use of machinery, the science and 
art of management rises to a position of major importance. 
Nearly everything which is bought and sold passes through the 
factory and is transported. Even staple food products, except 
fresh vegetables, fresh milk, and, in part, fresh fruits, pass 
through the factory. 


16 


CHARACTERISTICS OF MODERN INDUSTRY 


17 


The automotive industry is the foremost representative of a 
new type in industry—mass production, high total overhead 
expenses, and a tendency to reduce prices in order to reach a 
large group of consumers and to gain the economies of large- 
scale production. One cause which has been assigned to account 
for the superiority of the automotive industry is the “policy of 
passing on reduced costs to consumers.” Two changes in pro¬ 
duction methods are especially noteworthy in the automotive 
industry: (a) increased use of automatic machinery, and (b) the 
use of machinery for handling and conveying materials and out¬ 
put. Consequently, the relative demand has decreased for 
skilled workers (craftsmen) and for laborers to carry or wheel 
materials and products. The wheelbarrow and the hand shovel 
are antiquated in large-scale industry. The amount of highly 
skilled work and of back-breaking work has declined relatively, 
and there has been a marked increase in the demand for ma¬ 
chine tenders and assemblers. The machine is insistently calling 
for a new type of workers who may easily be fitted into routine 
jobs. The tendency is to stamp out individuality and originality 
from the mass of workers, to accentuate the importance of the 
planning room and of management. Mass production tends to 
make workers more and more alike in skill and outlook upon 
life and its problems; but it does also tend to displace the most 
automaton-like workers and to utilize machinery in their place. 

In the sale of goods the vending machine is being used where 
salesmanship is not needed, where “goods sell themselves.” In 
such cases, the vending machine displaces unskilled workers 
who have been acting as clerks. The automatic telephone with 
its dial is driving out the “phone girls,” and the adding machine 
and computing devices are rendering unnecessary much routine 
clerical work. The automatic or machine “man” who can per¬ 
form a simple round of operations is one of the recent wonders 
of the machine age. Whenever a simple operation requires 
repetition, a machine may be invented to perform the work. 
Whether the machine is or is not invented and installed is a 
matter of business finance rather than of industrial technique. 

Men and Machines. Business as it is carried on today is 
favorable to machines rather than to men. Business is carried on 


18 


ECONOMICS 


in order to get more business. Savings are poured into industry 
in order that more machines and capital may be produced. 
Capital begets capital. The great Ford business has had a high 
birth rate. Capital valued at approximately one hundred thou¬ 
sand dollars has multiplied with httle or no immigration or 
influx of dollars from outside investors until it is numbered by 
the hundred millions. This has taken place within a score of 
years. The annals of human birth rates exhibit no parallels. 
And, in this enormous and youthful machine plant or organism, 
mere human workers must obey without questioning the dictates 
of the engineers and business experts who act as the interpreters 
or high priests of business efficiency. Indeed, what is business 
efficiency today except conformity to the dictates of the amal¬ 
gamated order of machines? The “fool-proof’’ machine— 
with the orderly processes of which the human being can only 
with difficulty interfere—is the high-water mark of machine 
technique. 

The corporation is the acme of impersonality. Up to date the 
large corporation constitutes the flnest token of machine domina¬ 
tion and of human subordination. It is the crest of the wave that 
is submerging the old order of men and that is making us slaves 
of the machine process. Men may come and men may go as 
managers, owners, or wage workers without in the least affect¬ 
ing the even tenor of the progress of the corporation. The mod¬ 
ern trust company in its advertising boasts of its superiority 
over the individual. 

The preeminence of the machine is making the old life of 
semi-isolation with its emphasis upon individual and family 
traits chiefly a matter of historical signiflcance. Street life, fac¬ 
tory life with its groups of workers engaged in common tasks, 
the educational system with its large classes and units, common 
and standardized amusements, the growth of club and frater¬ 
nity life—all tend to mark the members of industrial society with 
a similar stamp. Even the family, that stronghold of individual¬ 
ism, is seeing its influence upon child life gradually weakened. 
Medical clinics, hospitals, kindergartens, supervised public 
playgrounds, the public schools, the popular amusement house, 
the automobile, and the radio are all reaching out for functions 


CHARACTERISTICS OF MODERN INDUSTRY 


19 


that were the monopoly of the old-fashioned home of the iso¬ 
lated pioneer. And, furthermore, the working-away-from-home 
mother and the working-away-from-home children were un¬ 
known in the traditional American home. 

Even in the educational world the struggle is on, more or less 
consciously, between those who advocate that the youth should 
be educated so as to make for initiative and thoughtful re¬ 
sourcefulness and those who would mold the youth to fit into 
the modern machine process and business technology as care¬ 
fully drilled speciahsts who may readily become excellent valets 
of the corporation and the machine. In the world of machines, 
standardization is a word and process which is given high rank. 
Our school system has succumbed to the pressure of machine 
requirements. Pupils are being , standardized and regimented 
in an unprecedented manner. The ideals of education are be¬ 
coming deeply colored by the machine process. To turn the ma¬ 
chine into a servant of man may be only the hope of a Utopian. 
Perhaps science can only be the friend and coworker of the ma¬ 
chine. Nevertheless, if there be such a thing as social science, 
its function is to enable man to regain premiership in the realm 
of industrial institutions. 

Fortunately, there is plausibility in the assertion that the 
evils of the machine process are due in a large measure to the 
incomplete expansion of the sphere of the machine, that indus¬ 
trial friction today is in a large measure a growing pain which 
will pass away with more complete utilization of the machine. 
If the present considerable restriction of immigration into the 
United States is continued for a few years, a notable laboratory 
experiment in social science may be worked out. Scarcity of 
workers and high wages furnish incentives to the wide-awake 
enterpriser to utilize more and more machinery. While the in¬ 
dustrial progress of the United States has been hastened and 
its direction modified by the great influx of immigration during 
the last decades of the nineteenth century and the opening 
years of the twentieth, restriction of immigration will doubtless 
hasten further use of automatic machinery. The Iron Man may 
take the place of the semi-automatic worker. The fear that 
machinery necessarily calls for morons and other low-grade 


20 


ECONOMICS 


workers may prove to be unfounded. Adequate development 
of machinery may lead to the displacement of morons and the 
lower grades of unskilled workers by automatic machinery with 
skilKul operatives and repairmen. The empire of the machine 
may prove to be in actuality the empire of the skilled worker, 
the trained technician, and the cultured human being. 

The application of scientific methods will elevate many a task 
from the status of distasteful drudgery to that of a skillful and 
attractive job. This tendency is thrown into clear relief when 
a contrast is drawn between the operator of a steam shovel and 
the wielder of the old hand shovel, between the washing of 
dirty clothes by bending over the washboard and by means of 
the electric washer, or when a comparison is made of the engineer 
of a central heating plant and the fireman in a small fiat. Har¬ 
ness a job to machinery, natural forces, and scientific knowl¬ 
edge, and the ugliness is often sloughed off. Indeed, a new dig¬ 
nity attaches to such work. A large supply of unskilled workers 
helps to tie the workers to the machine; the latter sets the pace. 
Limit the supply of unskilled workers, and the machine is requi¬ 
sitioned to do new tasks. The machine then becomes the tool 
of the worker. 

Scarcity often gives distinction; it is an element in value. It 
is not unreasonable to argue that with increasing scarcity of 
workers willing and eager to perform menial and unlovely tasks 
may come a higher esteem for those who are willing to perform 
necessary but disagreeable tasks. In a large city the collection 
of garbage is an essential occupation; a scarcity of garbage 
collectors may lead to the ascription of more merit and the 
payment of higher wages to those who perform such tasks. 

It is not entirely unreasonable to assume that civilization is 
only on the threshold of the age of machinery. The machine is 
introduced very slowly in countries where wages are low. Better 
training, on one hand, for the coming generation and, on the 
other hand, a decrease in the number of poorly trained or un¬ 
skilled may lead in the next few decades to an unprecedented 
increase in capital and in output and also in dependence upon 
scientific methods. Machinery may become in truth the servant 
of an educated mankind. May it not be that the evils in our 


CHARACTERISTICS OF MODERN INDUSTRY 


21 


factories and workshops which are attributed to machinery are 
in reality the result of the partial use of machinery? Are not a 
great multitude of routine machine feeders and tenders doing 
work which the machine can and will perform if machine feeders 
become scarce and able to obtain high wages? With the use of 
machinery to feed machines, the demand for purely routine 
work decreases; the moron type of worker is no longer needed. 
Imperfectly developed machinery makes man the slave of the 
machine, but a fully developed machine age emancipates man 
from drudgery and unskilled work. 

The skilled worker may become the normal type of American 
wage earner, and opportunities for high-grade positions may in 
the future depend less upon a great supply of unskilled workers 
than upon an adequate supply of capital. The fully developed 
Iron Man can be made the servant of man; the Iron Man may 
not necessarily be an evil spirit condemning vast hordes of 
humans to routine and drudgery. A notable increase in scientific 
and purposeful education may place mankind on the threshold 
of new and alluring possibilities of productivity, of social better¬ 
ment, and of industrial peace. The problem of achieving in¬ 
dustrial peace, let it be repeated, is one in social mechanics, 
and it is not Utopian to urge that the solution can be 
ascertained. 

Mass Production. Mass production is accompanied by high 
overhead expenses—that is, expenses which are practically the 
same whether the plant produces a large output, is running 
part-time, or with a portion of the plant idle. The average value 
of machinery and equipment per worker in the normal manu¬ 
facturing plant has increased considerably in recent years. 
Expensive and delicate machinery placed in the hands of in¬ 
efficient or disgruntled workers is an invitation to financial 
disaster. Breakage, repairs, and overhead expenses bulk large 
per worker and per unit of output in plants where the morale 
of the workers is low. The good will of the employees becomes 
of increasing importance as the capital investment per worker 
mounts. Teamwork, contented workers, excellent morale, be¬ 
come the watchwords of wide-awake executives in large-scale 
industry. The urge of profit-making in business involving high 


22 


ECONOMICS 


overhead or constant expenses also directs the attention of 
management to the stabilization of business. The higher the 
overhead expenses as compared with those which vary in propor¬ 
tion to output, the greater the incentive to keep the plant 
running regularly and with a full force of workers. Mass pro¬ 
duction diminishes the relative importance of the speculative 
element in business, and, as interest in speculation fades, interest 
in technical processes, in human relations, and in the quality 
of product, grows. 

Mass production with its increased use of power, machinery, 
and scientific management has resulted in a distinct decrease 
in the length of the average working day. Leisure is no longer 
the birthright of only a small group. The mass of workers are 
in sight of the eight-hour day and the five-day week. Increased 
leisure, in turn, will lead to increased desires for goods and 
services and to larger markets for the output of mass pro¬ 
duction. 

In nearly all major lines of business activity except farming, 
the corporation has become the controlling factor. The corpora¬ 
tion allows wide separation of ownership from management. 
Many stockholders in large corporations know little or nothing 
about the technique of the industry. They have never visited 
the plant or plants belonging to the corporation of which they 
are stockholders. Furthermore, the ownership of shares of stock 
changes from day to day as stock-market operations occur. 
The typical stockholder of a large corporation is absentee and 
drifting. 

Another characteristic of modern production methods is the 
use of a staff of technical experts. Research is a tool of modern 
industry. The development of personnel departments and the 
rise of “welfare” activities mark other noteworthy steps in 
production methods. Mass production also implies standardiza¬ 
tion and simphfication; it is characterized by low prices, low 
unit profits, and high wages. Production costs can be reduced 
to the lowest terms in the case of a commodity that can be highly 
standardized and that can be produced and sold in large quan¬ 
tities year after year without modification in style or quality. 
Mass production is literally production for the masses. The 


CHARACTERISTICS OP MODERN INDUSTRY 


23 


famous Model T Ford car represented the high-water mark in 
the economies of mass production. The machines used and the 
workers employed in the Ford factory were highly specialized. 
The expense of changing to meet new demands on the part of 
consumers is excessive in a large-scale business producing a 
highly standardized product. 

The recent eclipse of the old Ford car discloses certain dan¬ 
gers which confront mass production. (1) It has limits in sales 
resistance. Constantly increasing standardization of output 
and continuity of operation in order to gain the economies of 
large-scale production mean wider and wider markets and more 
and more stress upon salesmanship. High-pressure salesman¬ 
ship with rising sales cost is the inevitable accompaniment of 
mass production. Many plants have overbuilt in a vain effort 
to cut costs, only to lose the production economies in the added 
expenses of marketing an enormous output. Mass production 
finds its limits in high-cost distribution of its output. (2) As 
wages increase and as consumers utilize more purchasing power, 
uniformity becomes less desirable from the point of view of the 
purchasers. Style or non-uniformity is demanded. Mass pro¬ 
duction finally is in danger of finding itself in a serious dilemma. 
Economy in production demands uniformity and simplification; 
but sales costs rise with large output, and consumers begin to 
place increasing emphasis upon a product which is not standard¬ 
ized to a high degree. 

Are we nearing the end of the era in which the economies of 
mass production are accorded first place in the eyes of business 
men? Are we passing into a new epoch in which the style de¬ 
mands of consumers and the rising cost of high-pressure sales¬ 
manship will check the tendency toward mass production 
carried to an extreme? 


Questions 

1. Has machinery improved the lot of the worker? 

2. What is mass production? 

3. What are the prominent characteristics of mass production? 

4. Are there limits to mass production? 

5. What kinds of articles are not suitable for mass production? 


24 


ECONOMICS 


References 

Dubreuil, H., Robots or Men. 

Dunn, R. W., Labor and Automobiles. 

Marshall, L. C., and Lyon, L. S., Our Economic Organization. 
Mazur, Paul M., American Prosperity. 


CHAPTER IV 


PEODUCTION 

What Is Production? Production is the process of getting 
goods and services to men, women, and children, when and 
where wanted, and in the form wanted. Nearly all commodities 
bought and sold are the results of a process of production. In 
the broad sense of the term, production means the creation of 
utilities or qualities in goods and services which satisfy human 
desires. The manufacturer takes a lump of iron ore and forms 
it into a steel rail. It is his function to put a commodity into 
such form that it is usable. The baker makes bread out of flour. 
He produces form utility. The farmer, the miner, and the 
lumberman may also be classifled as the producers of form 
utility. Workers who transport commodities from a place where 
there is a large supply and small demand at profitable prices to 
a place where there is large demand are called producers of 
place utility; the process may be called transportation produc¬ 
tion. The railway trainmen or truck drivers are examples of 
such producers. In the third place, men who hold commodities 
in storage until needed produce time utility. The operator of 
a cold-storage plant is a good example of the producer of time 
utility; he is concerned with storage production. The efforts 
of certain professional workers, such as musicians, physicians, 
and teachers, and of other workers, such as barbers and domes¬ 
tic servants, result in the production of services instead of com¬ 
modities. This may be designated service production. The 
production of time and place utility will be considered under 
the general heading of marketing. In this chapter the discus¬ 
sion of production will be confined chiefly to form utihty. How¬ 
ever, certain fundamental principles are common to all types of 
production. 

Factors in Production. Efficient production is the result of 
the proper combination of four factors in production: land or 

25 


26 


ECONOMICS 


natural resources and forces, capital (tools and machines), 
human labor power, and managerial ability. The active, deter¬ 
mining, and calculating factor is that of managerial ability. The 
manager or enterpriser of a business, whether it be large or small, 
makes decisions as to the product to be produced, and as to the 
relative and total amounts of land, labor, and capital to be used 
in the business unit. Management possesses or has easy access 
to the stores of accumulated knowledge or technique relating 
to industrial processes and methods. In a small one-man busi¬ 
ness it is clear where the managerial function is actually located, 
but in a complex business organized under the corporate form, 
no one man can be pointed out as exercising the entire mana¬ 
gerial function. Those exercising managerial functions direct 
the enterprise and take the financial risks. The small stock¬ 
holders in a large corporation bear many financial risks but they 
have practically no part in the active work of business manage¬ 
ment. On the other hand, a salaried employee who has little or 
no investment in the plant may make important decisions as 
to business pohcies. In recent years, through shop committees 
or other labor organizations, the wage earners are beginning to 
exercise some small degree of management. Under the corporate 
form of business enterprise management cannot be centered 
upon one individual. It is a function distributed among differ¬ 
ent persons. Good management in industry involves both leader¬ 
ship and organization. Excellent leadership of a disorganized 
and poorly coordinated group of workers inevitably means con¬ 
fusion and ineffectiveness, and an excellent organization with¬ 
out leadership will produce little. Good organization and good 
leadership are as essential in business as in football. 

The new view as to production methods, sponsored by 
Henry Ford, is that increased profits come from increased de¬ 
mand, and increased demand results from the payment of 
higher wages and from lower prices. This plan for productive 
activity calls for large outputs at low unit costs. Good manage¬ 
ment is essential under the new business methods. Reduction of 
waste of materials, better equipment, improved organization of 
departments, greater individual efficiency, more teamwork be¬ 
tween management and men, regularization of operation, cost 


PRODUCTION 


27 


accounting, more attention to lighting, sanitation, and other 
features which reduce sickness, fatigue, and unrest, and the utili¬ 
zation of the results of research are features of the new method 
of production. Back of this idea of business management lies 
the concept that the wages and standards of Hving of Ameri¬ 
can workmen should not be reduced to any important extent, 
and, if reduced, would in turn spoil the market for goods pro¬ 
duced under the mass production method. 

Increased Productivity. The problem of increasing the effi¬ 
ciency of productive methods may be viewed from a negative 
and from a positive point of view. (1) On the negative side, 
the efficiency and sufficiency of production may be improved by 
reducing the demand for useless and harmful articles. This is 
primarily a matter of education. The education of the consumer 
is difficult, but the results of our efforts during the World War 
indicate that the task does not present insuperable difficulties. 
Four goals may be noted. 

(а) Reduce the demand for useless articles. 

(б) Reduce the demand for harmful articles. 

(c) Reduce the demand for articles produced under dehu¬ 
manizing conditions and increase the demand for goods pro¬ 
duced under good working conditions. 

(d) In case of two commodities practically equal in useful¬ 
ness, center demand upon the one which can be most easily 
produced.^ 

(2) On the positive side, the problem is to get the desired 
goods and services produced with the least waste of human 
effort and of material resources. The task is one of management 
involving human and industrial engineering and cost account¬ 
ing. How can efficient and effective factors of production be 
obtained? How can these factors be properly coordinated? On 
the positive side, productive efficiency depends in no small 
degree upon incentives, inventions, research, ability of indi¬ 
viduals, teamwork, and the skill of industrial managers. 

Incentives. The most important and complex work of the 
manager of a large business enterprise is not connected with the 
choice of tools and materials. It is concerned with the direction 

1 See Chapter on the Utilization of Commodities, 


28 


ECONOMICS 


of labor, with the management of the human element in industry. 
The effective cooperation of the wage-earning group with one 
another and with the management can come only as the result 
of an appropriate appeal to potent incentives. For signal in¬ 
dustrial advance there is needed scientific investigation of the 
incentives which lead to earnest endeavor and to eager team¬ 
work. The growth of large-scale industry has separated the 
manager and the wage worker. The personal or face-to-face 
relationship typical of earlier industrial epochs is, except in 
certain small businesses, a matter of historical significance only. 
Personal loyalty to the employer and the mutual interest of em¬ 
ployer and employee in one another are no longer potent factors 
in industry. The negative incentives of tongue-lashing and of 
fear of losing a job have been definitely proved to be inefficient. 
Eager, interested, and efficient workers can only be secured by 
means other than the blind application of traditional methods. 

From the point of view of the community the ultimate reason 
for business activity is the production of goods and services 
which satisfy human wants. The entire mechanism of big and 
httle business is for this purpose. The life of the community 
depends primarily upon the steady fiow of products and serv¬ 
ices. The purpose of pecuniary payments is merely to accom¬ 
plish this result. If profits and wages fail to bring excellent 
results, other incentives should be appealed to. And, what may 
such incentives be? In emergencies, other motives than pecuni¬ 
ary are habitually appealed to. Many of the kinds of achieve¬ 
ments which history applauds have been wrought under the 
spell of other than the pecuniary motive. The worth-while 
work in science, literature, and art may in a large degree be 
placed in this class. In war and athletics, non-pecuniary motives 
are also important. In two factories of similar type the wage- 
rates paid and the plans for wage pa 3 nnent may be practically 
the same, but, because of different types of management and 
different treatment of the working force, the output per worker 
may vary appreciably. Our knowledge of the relative potency 
of different incentives is elementary. 

Inventions. Again, the amount of goods and services pro¬ 
duced for the community depends upon the invention of new 


PRODUCTION 


29 


processes and tools. While this fact is quite generally under¬ 
stood, little careful study has been made of the conditions 
which bring forth and stimulate inventors. Invention has 
hitherto been chiefly a haphazard process. Guesswork and luck 
have been pointed to as the guideposts of the inventor. Are 
men born inventors or do conditions make men inventors? How 
may society stimulate invention? Can invention be placed on 
a scientiflc basis? These are important questions from the stand¬ 
point of productive efficiency and industrial progress. It seems 
not improbable that scientific management may be applied to 
invention as well as to routine work of a factory, that invention 
may become dehberate or planned instead of ^‘heroic” or acci¬ 
dental. 

Research. To the business man of yesterday, the business 
world was one of mysteries. Hard work, courage, and luck 
were the only keys to success. Much of the unknown in physics, 
geography, astronomy, and other natural sciences has been 
translated into the known and the understood, but men have 
persistently looked upon the vicissitudes of the business world, 
upon booms and panics, upon depression and prosperity, upon 
successes and failures as matters beyond the yardstick of sci¬ 
entific investigation. But, today, the successful business man 
must of necessity plan for the future. His success or failure 
depends upon his plans. He must use statistics and research 
instead of hunches and guesswork. The up-to-date business 
man is using research and statistical methods to forecast busi¬ 
ness emergencies with the bright hope of greatly reducing the 
dangers which beset the course of the old-fashioned business 
man who scorned statistics and research. Today it is research 
and planning or a dearth of profits and numerous receiver¬ 
ships. 

Industrial or business research is a systematic method of 
improving our ways of producing, marketing, and utilizing 
goods, of adding to our store of knowledge. Research is not a 
magical wand; it is not a cure-all for the ills which afflict the 
poorly managed establishment; it is a tool that, properly used, 
makes business judgment and experience more effective. Sta¬ 
tistics may make evident past errors, but the chief purpose of 


30 


ECONOMICS 


appealing to statistics and research is that of preventing serious 
mistakes in the future. Business men will more and more use 
the results of research in order to anticipate coming events. 

Trade journals, the publications of learned societies and of 
research organizations make it possible for the management of 
any industry to come into possession of important facts in 
regard to the latest developments in industry. Industrial suc¬ 
cess is no longer built upon carefully guarded trade secrets; it 
rests on the firm foundations of alertness in the utilization of 
scientific knowledge and of the results of research in the im¬ 
provement of processes, materials, machines, and practices. 
Science is merely pointing the way toward effective endeavor. 
Many contacts between science and industry are being estab¬ 
lished. In production rule-of-thumb methods are being quietly 
and rapidly displaced by science, accuracy, cost accounting, 
and research. Accounting reveals hidden sources of inefficiency, 
waste, and loss. It presents an accurate picture of business as 
a going and developing concern. Research men are set to work 
investigating the problems involved in improving machines 
and methods. As the result of research, industrial psychology 
is beginning to yield valuable material which will be used to 
improve the art of management, the key to modem industrial 
control. 

Ability of Individuals. The conflict between the exponents 
of heredity on one hand and of environment on the other as to 
the relative importance of each in determining the character¬ 
istics of men and women is as yet not entirely at an end. It 
is quite certain, however, that both heredity and environment 
are influential in determining the physical and mental character¬ 
istics of each individual. The traits of character demanded 
of the individual worker in the industrial world vary greatly 
with the type of occupation and of work. Honesty, sobriety, 
regularity, and punctuality are requirements upon which the 
modern industrial order places a high value. For the more 
highly skilled work and for executive positions much emphasis 
is placed upon judgment and initiative, but the average worker 
on jobs which do not require a high degree of skill is usually 
required to follow orders without deviation or question. 


PRODUCTION 


31 


Teamwork. A football team of individual stars is not neces¬ 
sarily a dangerous antagonist of another team highly developed 
in cooperative effort or teamwork. Likewise, in an industrial 
plant, teamwork is an absolute requirement for efficient results. 
The acid test of good management is cooperative effort on the 
part of all grades of workers from the general manager to the 
man who sweeps the floor. The plant in which strikes occur or 
in which restriction of output and sabotage are recurrent fea¬ 
tures is almost without exception one in which the management 
is poor and traditional. 

Importance of Management. Since the task of coordinating 
the other factors in production devolves upon those exercising 
the managerial function, the work of management is of great 
industrial import. The desirability of using scientiflc methods 
in selecting managers should be stressed. It is now left in no 
small degree to chance or to a “pull.’^ What are the speciflca- 
tions of the managerial job? What type of man is required for 
manager? What sort of education is desirable? Is a special 
course of training essential? Economists and engineers who are 
stressing the ideal of productive efficiency are insisting that 
credit and directive opportunity be given to those possessing 
managerial and inventive abihty instead of to those who merely 
possess wealth. It is clearly contrary to the fundamentals of 
welfare economics and national efficiency to commend highly 
an order of things which allows men ignorant of scientiflc 
methods actively to control and direct large business operations. 
It would be socially advantageous if industrial leaders, after 
they have made good in the business fleld, would turn their 
attention to the study of methods of improving industrial con¬ 
ditions and programs instead of retiring to devote their talents 
and money to philanthropy or other polite occupations. This 
would indeed be “public service in private business.” 

Differences in Productivity. Production is now largely car¬ 
ried on by organized and directed groups. A factory or a rail¬ 
way system is an organized group. The factory system has 
won its place in the industrial fleld because a group of workers, 
united into a team, can produce more than the same num¬ 
ber of workers working independently and separately. One 


32 


ECONOMICS 


factory may be more productive than another because it 
utilizes: 

Better buildings or equipment. 

More efficient workers. 

More effective teamwork between management and men, and be¬ 
tween departments. 

Better cost accounting systems. 

Better methods of selecting and training workers of all grades. 

More effective appeals to primary human incentives. 

Pecuniary Productivity. From the standpoint of the busi¬ 
ness man—manufacturer, railway operator, or the manager of a 
storage plant—the primary purpose of doing business has been to 
make profits, to obtain a monetary income. The business man 
has not been first and foremost interested in producing goods, 
but the consumer wishes an abundance of goods and services 
at low prices. The business man is interested in production 
from the pecuniary point of view, but the community wishes 
physical productivity. Modern business produces for a market, 
and business welfare is measured from the pecuniary rather 
than from the physical point of view. Goods are made and 
marketed in order to make money, to obtain a profit. Making 
money does not necessarily mean the same as making goods. 
Business men have been concerned with “the strategies of cut¬ 
ting costs, of calculating price movements, of salesmanship, and 
of financing. From the purely business point of view physical 
production is a by-product of profit-making. 

The attitude of the business man toward the output of his 
establishment will be governed by the exigencies of profit¬ 
making. Under certain conditions a sagacious business man 
will reduce his output of goods in order to keep up the selling 
price of each unit produced. Increased production in the in¬ 
dustry as a whole may decrease the value of the total output. 
The farmers fear the consequences of a bumper crop of wheat. 
The monopolist often restricts output in the hope of obtaining 
for himself a maximum amount of profits. Mass production, 
with its large overhead expense and consequent reduction of 
unit costs as output increases, usually results in large physical 


PRODUCTION 


33 


production, low costs, and low prices. In mass production the 
quest for profits and the desire for large physical productivity 
tend to run in parallel channels. 

The original basis of industry was service. Primitive, feudal, 
and pioneer peoples were primarily interested in making service¬ 
able goods for their own utilization. In planning his work the 
pioneer asked: Do I want this product? Does my family need 
this article? With the growth of markets, specialists, and ex¬ 
change came the gradual substitution of profits for goods as the 
prime motive for industrial activity. Today’s industrial and 
money economy leads us to be interested primarily in money 
making. The making of serviceable goods is incidental only to 
profit taking. Benefits—profits—may often be obtained by 
monopoly or restriction of output, by disservice. The modern 
business man asks: Can this article be produced and sold for a 
profit? The pioneer was interested in natural conditions, such 
as the weather and the supply of raw materials; the modern 
business man is immediately concerned with prices and price 
changes. The business tool, money, has modified the direct aim 
of work-activity. Our problem today is to get back to the first 
principles of pioneer industry. The engineer’s point of view 
needs emphasis. ^‘The community needs service first, regardless 
of who gets profits, because its life depends upon the service it 
gets.” How may affairs be so ordered as to give the greatest 
rewards to those who produce instead of to those who with¬ 
hold, who are shrewd bargainers and speculators? 

For a profit business men will work strenuously and efficiently 
for the production of disserviceable goods, provided the consumer 
has a taste for such goods backed by purchasing power. How¬ 
ever, if he had a taste for disserviceable goods, the pioneer 
would produce them. Intoxicating liquors were not unknown 
in the homes of the pioneer. The producer produces what con¬ 
sumers demand. Change the demand of consumers and the 
producer is attracted to a new product. The producer is neutral 
as to serviceable goods or illth. Instead of attacking the money 
economy as the cause of waste and disservice, is not the direct 
line of procedure that of changing the tastes of the consumer? 
Furthermore, the money economy is a human institution. It 


34 


ECONOMICS 


is doubtless possible to modify the money economy so that it 
will become more serviceable. 

The interdependence of human beings in the present indus¬ 
trial era because of specialization of occupations and exchange 
of goods has increased the desirability of fair treatment of fel- 
lowmen. The crude individualism and rugged independence of 
the frontiersman become menaces in the days of public utili¬ 
ties, pure food laws, and telephones. A willful group may pe¬ 
nalize a city, may injure persons far distant and unknown, and 
stop the functioning of a great transportation system. The em¬ 
phasis upon the rights of the individual that our fathers stressed 
must be decreased and more emphasis must be placed upon the 
rights of the bystander, the so-called general public. We recog¬ 
nize the need of this change in emphasis by speaking of busi¬ 
nesses “affected with public interest.’’ Industry calls for co¬ 
operation rather than for competitive action, for teamwork 
instead of individual and isolated effort. Harmonious and united 
action wins in the field of industrial endeavor as well as on the 
football field. The old problem of harmonizing authority and 
liberty, the rights of the individual and of the group, is a sig¬ 
nificant one today. 

Welfare and Profits. Since the modern business unit is char¬ 
acterized by the separation of ownership and management, by 
the presence of large overhead expenses, and by the employment 
of technical experts,^ it may not unreasonably be expected 
that the emphasis upon profit-making will give way in part to 
stress upon producing a serviceable and needed product at a 
fair price, or upon the offering of employment to wage workers 
at fair wages and under good working conditions. No simple or 
dogmatic conclusion can be reached. Certainly an industry 
must make profits—get a larger return than it pays out for 
running expenses—or it cannot long continue to serve either 
the community or its stockholders. Doubtless many business 
firms have not formulated well-defined purposes; and different 
elements in the business, such as investors, active managers, 
skilled workers, and common laborers, will not agree as to 
goals. 

1 See Chapter on Characteristics of Modern Industry. 


PRODUCTION 


35 


Given certain ends or aims upon which employers (investors 
and managers) and employees agree, it will not be difficult to 
unite in regard to the method which should be used to get re¬ 
sults. But a scientific method may be used to accomplish results 
which may be held to be good or to be undesirable. Science may 
be utilized for destructive as well as for constructive purposes. 
The prime difficulty in regard to the introduction of scientific 
methods into industry and into the management of men will 
come because of differences in regard to aims, goals, or purposes. 
If the fundamental purpose is increase in dividends and, as a 
consequence, greater subordination is required of workers, we 
may expect a rising tide of antagonism on the part of the work¬ 
ing group, or at least a lack of enthusiastic cooperation with the 
management. 

Are individuals and groups in the United States gradually 
developing a sense of interdependence and of responsibility for 
social well-being? Are there visible forces operating today in the 
economic field which tend to reduce social irresponsibility? If 
so, can a national policy be outlined which will help in directing 
the pursuit of private wealth, income, and profits into channels 
which lead to the improvement of national and social well-being? 
Or, is it feasible through governmental action or through the 
efforts of private associations to develop regulations which will 
make easy the way toward greater emphasis upon social good? 
Glenn Frank has well said: ‘‘The American business man is at 
one and the same time profit maker and civilization maker. 
Can the conditions under which profit making occurs in the 
fourth decade of the twentieth century be made to aid in build¬ 
ing civilization? These are important questions which are not 
to be answered in a spirit of undue optimism or complacency. 
It is urged that a calm and deliberate consideration of the prob¬ 
lem will disclose certain positive forces or influences which are 
tending at the present time to direct the old and powerful profit¬ 
making motive into channels leading toward community well¬ 
being. The attention of the reader is called to a group of such 
forces which are guiding industry toward goals that look desir¬ 
able to management, employees, and consumers. 

Business management is gradually evolving into a profession. 


36 


ECONOMICS 


The corporation easily makes it possible to separate ownership 
from management, to allow one group of men to own stocks 
and bonds, to be silent and absentee partners, while another, 
and usually a smaller, group drawing salaries has the active 
management of the industrial activities of the organization. 
The hired executives and the industrial experts who have little 
or no investment in the industry with which they are connected 
are comparatively new and attractive figures in the business 
world, but industrial evolution is tending definitely to separate 
the investor from the managerial expert. Management is becom¬ 
ing more and more hired management; it is not directly depend¬ 
ent upon risk-taking and profits for its income. 

For good or for ill we are beginning to develop and accept 
new theories of managerial responsibility to employees, to cus¬ 
tomers, and to the public as well as to the stockholders and 
bondholders of a corporation. The new type of management is 
emphasizing regularity of operation, good quality of output, 
and excellent working conditions for workers. It approves of 
stability of business and of returns; it is interested in productiv¬ 
ity and service rather than extraordinary pecuniary profits. The 
field in which the profit-making motive holds undisputed sway 
is being narrowed. The idea that industry can and should be 
improved and stabilized from within by the application of 
scientific methods and the acceptance of the long-run point of 
view is being looked upon with favor by more and more hard- 
headed business men. Science is being linked with business, 
and speculation is no longer looked upon favorably by the new 
leaders of industry. Science and trained industrial managers 
are together reducing risk and stabilizing business. The members 
of the investor group are interested in getting as large a return 
as is consistent with security of investment. But, in basic and 
established industries, the typical dividend return is diminish¬ 
ing as the risk decreases. Except in new and experimental in¬ 
dustries, the tendency is toward a standardized return; the 
speculative element is becoming less and less prominent. Great 
fluctuations in business and an abundance of speculative op¬ 
portunities have made for inefficient and careless management. 
^‘The days of profit margins sufficiently wide to absorb the mis- 


PRODUCTION 


37 


takes of faulty management are rapidly drawing to a close 
a new era is at hand. The automobile industry, for example, is 
getting out of its initial and highly speculative stage. Progres¬ 
sive executives of today are especially interested in reducing 
costs and in stabilizing business. Only trained business men who 
are not watching the fluctuations of the stock market can bring 
about remarkable reductions in costs. Speculation is a stub¬ 
born foe of efficiency, of stabilization, and of science in business. 
The American nation has been paying too much for speculation. 

Large corporate enterprises are planning for years to come. 
Management is now looking far ahead; it is building for the fu¬ 
ture. The policy of a business which aims repeatedly to resell 
to its customers will be far more solicitous about the quality of 
its product and the needs of its customers than is the little, 
short-lived business which looks no farther than today’s sales 
and profits. The dominant business purpose or aim is clearly 
not the same in a public utility, such as an electric lighting 
plant, as it is in the case of a small grocery store or a Florida 
real-estate firm; it is quite different in the case of a large well- 
established department store from that which actuates the 
itinerant pedlar who does not expect again to visit a particular 
town. One takes a long-time view of sales and profits; the other 
is alive only to today’s receipts. The long-time view more 
nearly harmonizes the selfish motives of enterprises and the 
needs of the community than does the short-run view. The 
aims of a corporation organized on a fairly permanent scale 
are less likely to be anti-social than those of a business which 
may be expected to close down within a short period of time. 
One must cultivate the good will of customers; the other cares 
little about the attitude of a customer after a sale is actually 
concluded. 

Large-scale industry demands wide markets. High wages 
and a reasonable amount of leisure will mean larger markets for 
the output of large-scale industry. Low wages, long working 
hours, unemployment, and irregularity of employment, on the 
other hand, tend to curtail the purchasing power of the mass of 
workers. Since approximately 90 per cent of our trade is domes¬ 
tic, managers of big business must look to the building up of 


38 


ECONOMICS 


markets at home for their products, and a great home market 
can only be built up by putting purchasing power into the 
hands of the great masses of the population. The phenomenal 
growth of the low-priced automobile industry would be possible 
only among a people receiving a fairly large per capita income 
and maintaining relatively high standards of living. These 
and other influences ^ are tending partially to close the gap 
between profit-making and the welfare of the community. 

Questions 

1. Give examples of the production of time, place, and form utility. 

2. What are factors in production? 

3. Can farmers be too successful as producers of wheat? 

4. How did profits gradually supplant goods as the aim of producers? 

5. Why is fair treatment of fellowmen more important today than in 
pioneer times? 

6. Do you believe that social responsibility is becoming increasingly 
desirable? Why? 


References 

Marshall, L. C., and Lyon, L. S., Our Economic Organization. 

Soule, George, The Useful Art of Economics. 

Tawney, R. H., The Acquisitive Society. 

Taylor, H., Making Goods and Making Money. 

Tugwell, Rexford G., Industry's Coming of Age. 

1 For more complete discussion, see the writer’s article in The Joumal 
of Social Forces, Sept., 1928. 


CHAPTER V 


CAUSES OF INCREASED PRODUCTIVITY 

Industrial Civilization Rests upon Science, Power, and Ma¬ 
chinery. Throughout the early history of mankind and down 
to the opening of what is commonly called The Industrial Revo¬ 
lution beginning about 1760, the chief sources of power were 
the muscles of human beings and of animals. Productivity per 
worker was of necessity small. Until science, power, and ma¬ 
chinery became team mates, scarcity and famine were the herit¬ 
ages of each and every new generation. Relative plenty with 
an opportunity for comforts, for “jam on the bread,’^ has come 
only in recent generations with the ushering in of an industrial 
or power-machine civilization. We of today are hving in an age 
of great productivity relative to any preceding epoch in the 
life of the race. In the United States, the first three decades of 
the twentieth century, and particularly the years 1922 to 1929, 
have witnessed the outpouring of an enormous fiood of goods 
and services, and it is clear that we are by no means near the 
limit of our potential productivity. 

Great groups of our population are still perilously near the 
bare subsistence standard of living. Beyond the deficiencies in 
such necessities as food and clothing for certain non-privileged 
groups, there is the need for better housing facilities, for more 
improved roads and bridges, for much greater use of electricity 
and electrical equipment in the home and on the farm, for new 
and better heating and refrigeration apparatus, for public 
works, such as flood control, ship canals, and public buildings, 
for increasing our educational and research plants and labora¬ 
tories, for radio and air-craft developments, and for other com¬ 
forts and conveniences. The problem of how to increase pro¬ 
ductivity and decrease waste continues to call for further study 
and for the application of engineering, human and mechanical. 
“Prosperity is a job for industry.” 

39 


40 


ECONOMICS 


It is the purpose of this chapter briefly to consider the causes 
of the increase in productivity that have occurred since the de¬ 
pression of 1921. There are other considerations growing out 
of our new interlocking industrial civilization to which we can 
only allude without a detailed examination. What are the chief 
dangers and obstacles now confronting the industrial civiliza¬ 
tion of today? Are we in danger of another World War? Will 
continued increase in population ultimately endanger high 
standards of living? What will be the probable effects upon the 
people and upon civilization of the new methods of producing 
commodities? Can human beings with an ages-long heritage of 
scarcity and hardship continue strong and virile in an environ¬ 
ment of prosperity, comfort, and ease? The forward thrust of 
industrial progress is placing before us new, difficult, and allur¬ 
ing problems for solution. We shall need all the wisdom and 
scientific knowledge the race possesses. Calm consideration of 
economic questions, not emotional outbreaks, is a prime need 
of the hour. 

The utilization of power is one of the significant yardsticks 
in measuring an industrial civilization. The accompanying 
tables indicate the increasing use of power in the United States. 

Horsepower Equipment per Employee (Less pleasure automobiles) 
(From the Harvard Business Review, April, 1928, p. 290.) 


year 

HORSEPOWER 

1849 

1.44 

1859 

1.50 

1869 

1.53 

1879 

1.56 

1889 

2.05 

1899 

2.21 

1909 

2.96 

1919 

4.25 

1923 

5.31 


The table on page 41 shows clearly the growing relative de¬ 
cline of agriculture as an industry, the marked increase in the use 
of power on steam railways since 1900, the very rapid rise in im¬ 
portance of electric central stations, and the decline in the use of 


Total Horsepower Equipment in Each Field of Activity ^ 
(From the Harvard Business Review, April, 1928, pp. 283-284.) 


CAUSES OF INCREASED PRODUCTIVITY 


41 


work 

animals 

NOT ON 

FARMS 

1,150 

CD 

O 

T—1 

1,687 

2,160 

2,675 

3,055 

3,405 

1,979 

1,700 

automobiles 

BUSINESS 

ONLY 







256 

10,964 

53,724 

TOTAL 






32 

7,714 

230,432 

507,254 

ships 

734 

1,142 

1,076 

1,110 

1,444 

1,900 

3,122 

6,584 

10,262 

STEAM 

RAIL¬ 

ROADS 

435 

1,940 

o 

o 

7,720 

o 

CO 

CD*' 

20,900 

45,400 

72,300 

74,600 

electric 

rail¬ 

roads 





140 

o 

T—1 

3,718 

6,327 

' 6,784 

electric 

CENTRAL 

STATIONS 





120 

1,200 

5,225 

15,250 

22,000] 

IRRIGA¬ 

TION 

AND 

DRAINAGE 




xo 

33 

120 

361 

816 

1,300 

AGRI¬ 

CULTURE 

6,597 

9,655 

9,588 

13,764 

19,835 

23,519 

31,107 

43,722 

47,420 

MINES 

AND 

QUARRIES 

50 

150 

350 

650 

1,300 

2,868 

4,608 

6,724 

7,500 

MANU¬ 

FACTURES 

o 

o 

1—1 

o 

o 

co^ 

T—1 

2,346 

3,411 

5,939 

10,098 

18,675 

29,505 

33,094 

YEAR 

1849 

1859 

1869 

1879 

1889 

1899 

1909 

1919 

1923 


Horsepower in thousands. 
































42 


ECONOMICS 


work animals. The increasing use of power by our railways 
points toward more and more geographical specialization of 
industry, and the development of central stations indicates an 
increasing use of electricity for power purposes. It has been 
roughly estimated that the energy developed in the United 
States from coal, oil, and water power is equal to that of three 
billions of servants. Doubtless today this estimate should be 
made somewhat larger. 

Characteristics of Modem Production Methods. Since the 
opening of the World War in 1914, our industrial methods and 
equipment have undergone such extraordinary changes as almost 
to constitute a new industrial revolution. Between 1899 and 
1925 the output in physical units increased: 


Of agricultural products 
Of mining products 
Of manufacture 
Of railway service 


about 47 per cent 
about 248 per cent 
about 178 per cent 
about 199 per cent 


The weighted total for these four branches of industry shows 
140 per cent increase for the quarter of a century. The popula¬ 
tion of the nation increased about 55 per cent; consequently, 
the per capita output rose about 55 per cent. However, the 
addition of 140 per cent in the four industries was accompanied 
by a gain in the number of workers of only 34 per cent, or, the 
gain in productivity per worker was nearly 80 per cent. From 
1919 to 1925 there was an actual decline in the number of 
workers in the four major industries, in the ratio of 100:93.^ 
A well-known statistician, R. W. Babson, estimates that to 
produce the same number of automobiles in 1928 as in 1914 re¬ 
quires only 30 per cent as many workers; rubber tires, 40 per 
cent; cigarettes and cigars, 42 per cent; metal, other than iron 
and steel, 60 per cent; stone, clay, glass, and chemical products, 
66 per cent; iron and steel, 76 per cent; food and kindred prod¬ 
ucts, 80 per cent; paper, printing, and related products, 90 
per cent; and textiles, 95 per cent.^ 

This significant increase in the productivity of American 

1 Report of the Secretary of Commerce, 1927, pp. XXVII ff. 

2 Commerce and Finance, August 22, 1928. 


CAUSES OF INCREASED PRODUCTIVITY 


43 


industry has taken place in the face of a reduction in the average 
length of the working day. The Department of Commerce has 
estimated that the length of the average working day in all 
branches of industry was shortened about 15 per cent in the 
period 1899 to 1927. In the years from 1922 to 1929 some 
very considerable reductions in the cost of manufacture have 
been recorded. It has been pointed out that,^ in manufacture, 
production has increased, while the number of workers has de¬ 
creased; that wages have risen, while costs per unit of output 
have decreased; that the investment in capital has increased, 
while costs have been cut; and that wages have risen, while 
the length of the working day has been reduced. To the tradi¬ 
tional way of thinking about costs, wages, and the working 
day, these are paradoxical statements. Theoretically, these 
results are unexpected and incongruous. The experience of 
recent years in industry indicates quite clearly that high wages 
and a short working day may actually be economical and coin¬ 
cide with low production costs. A new vista is opened for the 
vision of the progressive industrial manager. 

The causes suggested for the large per capita productivity in 
the industries of the United States are many. Before consider¬ 
ing the special causes of the recent increase in productivity, our 
attention may be directed to certain of the more general influ¬ 
ences which have operated over a longer period of time. This 
nation has within its borders vast and diversified natural re¬ 
sources in minerals, timber lands, fertile agricultural lands, 
water power, navigable lakes and rivers, and good harbors. 
Our population has been of a capable type possessing vigor, 
initiative, and inventive genius. Much emphasis has been placed 
from our earliest colonial days upon education. We have 
been able easily to obtain industrial equipment, power, and a 
good and extensive transportation system. This vast area with 
different economic possibilities in each section has not been 
handicapped, as has Europe, by internal tariff barriers. We 
have also been blessed with a stable form of government. Our 
domestic market has been unrivalled in the world in magnitude 

1 Alford, L. P., Factory and Industrial Management, September, 1929; also, 
Recent Economic Changes, Vol. I, p. 166, 


44 


ECONOMICS 


and diversity. These and other advantages have enabled the 
United States to become a great industrial nation; and these 
causes have not been inoperative during the last decade. 

However, the marked increase in output per worker in manu¬ 
facture, mining, agriculture, and transportation from 1922 to 
1929 cannot be accounted for by means of the older stock ex¬ 
planations of great productivity in the United States. Abundant 
natural resources, physical magnitude, the use of machinery 
and of power may explain the long-run superiority of American 
manufacture over European, but these influences were at work 
long before 1922. There is little reason for asserting that these 
advantages were especially potent in 1922 to 1929. It is doubt¬ 
less true that greater emphasis upon standardization and sim¬ 
plification have helped to increase output. Another important 
factor in increasing output per worker is the use of conveyors 
and belts, and the placing of machines so that the human hand 
is not needed to put in or take out materials and products. In 
an up-to-date canning factory “it is literally true that no one 
sees the peas until the can is opened.’’ Other forces must be 
searched for, however, in order adequately to account for the 
extraordinary increase in per capita productivity in American 
manufacture from 1922 to 1929. 

The new element in the situation to which our attention 
should be directed is the increasing use of trained intelligence in 
managerial problems. The War and the period of depression 
from 1920 to 1921 marked the beginning of a new era in man¬ 
agement. Personnel administration, industrial psychology, sales 
engineering, business forecasting, and cost accounting were 
given places in industrial programs by the abler and more far¬ 
sighted managers. The adoption of new methods of handling 
workers accounts for much of the increased production in cer¬ 
tain lines of industry. More attention is being given to the 
factors discussed in the preceding chapter. 

Obstacles to Increased Productivity. With proper applica¬ 
tion, we have today sufficient knowledge of industrial technique 
and sufficient equipment greatly to increase the total produc¬ 
tivity of the nation above its present level. With growing com¬ 
plexity in the economic world comes greater need of coordination 


CAUSES OF INCREASED PRODUCTIVITY 


45 


and also more difficulties in bringing it about. ^^An Insti¬ 
tute of Industrial Coordination” might help. Unemployment, 
depressions, and enormous economic wastes may be reduced or 
eliminated by the use of trained industrial statesmanship. Sore 
spots in industry, such as farming, coal mining, and textile 
plants, may be cured. But there are obstacles which make 
progress toward a high-tide of productive efficiency slow and 
zigzag instead of rapid and direct. 

1. The alternations of the business cycle ^ cause enormous 
losses, due to idle machinery and men, in a time of depression, 
and extraordinary and feverish activity and over-development 
in a period of apparent prosperity. Wars and industrial depres¬ 
sions are the most expensive luxuries of modern peoples. 

2. Lack of coordination or of teamwork within an industry 
reduces productive efficiency. This may take at least two differ¬ 
ent forms. A business unit competing with many others may 
pay little or no attention to what competitors are doing. 
Farmers, fruit-growers, and soft-coal producers lack informa¬ 
tion as to what they are doing among themselves. They may 
presently discover that the productive capacity of the country 
has been over-developed for the profitable sale of the output. A 
condition of managerial anarchy, considering the industry as 
a unit, often obtains. Over-development, under-employment, 
irregularity, and inefficiency are the earmarks of maladjust¬ 
ment and of lack of teamwork within the limits of the industry 
considered as a unit. Again, each concern as a rule keeps secret 
as long as possible any new process or program which reduces 
costs or improves quality. In recent years the organization of 
institutes and associations for cooperative research, advertising, 
and buying is laying a foundation for better coordination in 
the future. 

The lack of teamwork in industry is also manifested in the 
suspicion and antagonism between the management of an in¬ 
dustrial establishment and the rank and file of its employees. 
The traditional attitude is one of working at cross-purposes. 
The wage worker has too often worked unwillingly and only 
under compulsion and fear. As long as workers are not inter- 

1 Discussed in Chapter on Business Cycles. 


46 


ECONOMICS 


ested in their work, are suspicious of the motives and the fair¬ 
ness of the management, are allowed to know very little about 
the industry in which they are employed, the sort of teamwork 
which brings into being the maximum of productive effort with 
a minimum of strain will not be obtained. Mechanical excel¬ 
lence, the utilization of power, and the application of scientific 
methods will not bring an industry to the high tide of produc¬ 
tive efficiency until there is added such direction of the man¬ 
power as will bring about teamwork, until the morale of the 
organization is excellent.^ 

3. A third hurdle in the road leading toward productive 
efficiency is absorption in speculation rather than in the more 
prosaic technical processes of business enterprise. Too many 
who are in a position to direct industrial enterprises watch the 
stock market. They are speculators rather than engineers and 
business experts. While certain types of speculation ^ make 
for economic betterment, too much of the best talent of the na¬ 
tion is engaged in stock-market transactions. To direct an in¬ 
dustrial concern with an eye to stock-market manipulation does 
not usually result in technical excellence. 

4. The great mass of workers and managers are somewhat 
suspicious of new methods. They are inclined to cling tena¬ 
ciously to tradition, to old methods and machines, especially 
if in the past these methods and machines brought good results. 
In these days of rapid evolution the old and tried methods or 
machines may be out of date and inefficient. ^‘The price of 
success is constant adjustment’^; and it is also the price of tech¬ 
nical efficiency. The leaders of today must be ready to scrap ma¬ 
chines, methods, and pet programs when a new and better ma¬ 
chine, method, or program appears above the horizon. One of 
the barriers in the road to increased productivity is the worship 
of the policy which was successful last year or last decade, but 
which is now out of date. 

Mental inertia and the pressure of custom and habit prevent 
many an individual from going off at a tangent into various 
vagaries and impractical programs, but these also take their 

1 See Chapter on Labor Management. 

2 See Chapter on Risk-Taking. 


CAUSES OF INCREASED PRODUCTIVITY 


47 


burdensome toll in a changing age by slowing down read¬ 
justments and by leading many to apply old yardsticks to new 
situations. One of the fundamental tests of the usefulness of 
an educational system is: Does it or does it not aid students in 
continuing to grow mentally after they have left college halls? 
Or, is its human grist composed chiefly of men and women with 
closed minds? “The handicaps of transition’^ are not incon¬ 
siderable in an age of flux and kaleidoscopic transformations. 
When industry is moving forward with great rapidity, mental 
and social inertia tends to make our thinking, our institutions, 
and our political and economic programs lag behind. 

5. What may, for the want of a more expressive term, be 
called “pohtics” in the enterprise often interferes with the most 
effective operation of a business. Appointments may be made 
because of “pull” or relationship to important stockholders 
or officers instead of upon merit or the past record of the appli¬ 
cant. An executive may attempt to build a personal “machine” 
or a following of employees who will work well for him but “sol¬ 
dier” on the job for others. In turn, these followers are pro¬ 
tected when mistakes are made and their advancement is fa¬ 
vored. Again, a department head or other executive may 
neglect or be afraid to train one or more young men under 
him to be competent assistants. Each executive, for the sake of 
smooth and continuous functioning of the industry, should 
have a trained understudy. This matter is, however, only a phase 
of a much more inclusive topic—the proper selection of workers 
of all ranks. Selection and training united constitute an or¬ 
ganized effort to put the right person in the appropriate place. 
Shop politics, haphazard selection of employees, and the lack 
of proper methods of training constitute important barriers on 
the road to larger productivity. 

Benefits of Recent Industrial Progress. At the outset of this 
chapter certain dangers of industrial progress were briefly 
alluded to. It may not be amiss to direct the attention also to 
some of the benefits which arise out of recent industrial ad¬ 
vances: (1) The total per capita output of goods and services 
has increased; (2) Diversification of consumption has been 
made possible because of the increase in productivity and in 


48 


ECONOMICS 


excellent market facilities, including those of transportation; 
(3) Greater leisure has become the birthright of the masses 
through the shorter working day and week; (4) Working con¬ 
ditions have improved. The workplaces are more sanitary, 
are lighted and ventilated more effectively, are safer, possess 
better toilet facilities than those of a generation or more ago. 
Furthermore, employing corporations are introducing insurance 
and recreation features which add attractiveness to the job. 
(5) Human engineering in up-to-date concerns has greatly im¬ 
proved the treatment of workers by the management. Much of 
the harshness and, too frequently, the brutality of the foremen 
in the typical factory, mine, or store of earlier days has dis¬ 
appeared. The worker is being released from the annoyances 
due to petty and arbitrary bosses. Industrial psychology is 
pointing the way toward better human relations in industry. 

Questions 

1. Give an example of increased productivity because of better rela¬ 
tions between management and men. 

2. Are we actually moving in the direction of cooperation and teamwork 
between management and men and away from antagonism? 

3. The technique of large-scale industry is one primarily of the applica¬ 
tion of scientific principles under conditions of harmonious human 
relations in industry. Explain. 

4. Do you think that the benefits of increased productivity outweigh 
its dangers? Why? 

5. Professor Patten declared that we are hving in a “pleasure econ¬ 
omy.” Explain. 

References 

Carlton, F. T., Education and Industrial Evolution, Chs. 3 and 4. 
Daugherty, C. R., in the Harvard Business Review, April, 1928, 
pp. 278-292. 

Recent Economic Changes, Vol. I, Ch. 2. 

Thomas, W., in the American Economic Review, Supplement, March, 
1928, pp. 122-138. 

Tugwell, Rexford G., Industry’s Coming of Age, Chs. 2-6. 


CHAPTER VI 


NEW PROBLEMS IN BUSINESS 

The Big Social Problem. The big problem of today in this 
complex, highly organized business and social world is to get 
the members of society so associated that they can live and 
work together peacefully. Peace between nations and within 
nations, international peace and domestic harmony, are vital 
to progress. Another big war will doubtless mean a new Dark 
Age. Continual industrial strife and friction—strikes, restric¬ 
tion of output, inefficiency, irregularity of business opera¬ 
tion—are putting modern industrial civilization in great danger. 
The losses in connection with alternations of the business cycle 
are enormous, and the more intangible ones due to inefficient 
management and to indifference and distrust on the part of the 
workers are likewise distressingly great. There is extraordinary 
need for studying in a scientific fashion the problem of regu¬ 
larizing industrial activity and of reducing industrial wastes of 
various kinds. Interdependence and complexity in the indus¬ 
trial field are making clear the need of finding a practical solu¬ 
tion. Stated in another way, the problem of the business 
world today is that of harnessing selfish interests so as to make 
for the welfare of society. 

Mechanical Science Has Outrun Social Science. Mechani¬ 
cal or physical science is far ahead of social science or human 
engineering. We know more about steel and wool than about 
men, about buying materials than about hiring employees. 
Business still uses pack-pedlar methods in buying and selling 
labor power. We are far more scientific in our development of 
processes of treating petroleum, coal, and cotton than in those 
of treating wage earners. The problem of incentives in indus¬ 
try, for example, has scarcely been considered; nor, has it in 
education. However, industrial leaders are beginning to see 
clearly that the art of getting teamwork is more important 

49 


50 


ECONOMICS 


than the efficient utilization of mechanical power. Too many 
business men have been proud that they are practical^^ men. 
Too many have been blindly following ^ Punches/^ the methods 
of their fathers or of their younger days. But the fundamentals 
in the social sciences and in the art of handling men are found 
in psychology, in the study of human behavior. Unfortunately, 
the typical business man knows little more about human nature 
and industrial psychology than he does about advanced calculus. 
No mechanical engineer is ignorant of a working knowledge of 
physics; in like manner, an executive should have a reasonably 
good foundation in industrial psychology. Many managers of 
business resent any advice from workers or from outsiders as 
to improvements in their plants. The retort is frequently heard 
that the manager knows all about the plant. Too many mana¬ 
gers are like the farmer of a few years ago who resented the 
efforts of the expert from the agricultural experiment station who 
tried to giye him advice in regard to seed corn. The American 
farmer is now quite generally past this naive stage of intelli¬ 
gence; but not so in the case of many business executives. 

One of the common complaints is that workers are not inter¬ 
ested in their work, that they restrict output, watch the clock, 
do not do a fair day’s work. Yet, in many cases they seem to 
have energy and interest enough while watching or participat¬ 
ing in a ball game. Many a lagging worker likes to do some job 
at home for himself or his family—and he will be interested in 
the task. Railway men will fight a vigorous campaign against 
snowdrifts. It has even been suggested that the business game 
is losing its zest for the executive as well as for the wage worker. 
If workers have lost interest and enthusiasm in their work, why 
have they lost it? If many men strike, “soldier” on the job, 
and practice sabotage, why do they do so? What is the reason? 
Is it because human nature is naturally depraved? Is it because 
of the artificiality and complexity of modern business with its 
excessive amount of repetition and routine? Or, is it because of 
traditional and unscientific managment? 

How we can get interest and enthusiasm into the daily round 
of industry is a big problem. Surely the present order is on the 
direct road leading toward disintegration unless the great mass 


NEW PROBLEMS IN BUSINESS 


51 


of skilled and unskilled workers and the managers, as well, can 
be led to work earnestly and efficiently, if not joyously. Effi¬ 
cient industrial management will develop teamwork; teamwork 
wins “in battle, baseball, and business.^’ Efficiency is largely 
a human problem. A similar situation is found in education 
in our schools and colleges. If we could get in the classrooms 
the enthusiasm displayed over athletics, many educational diffi¬ 
culties would disappear. Pedagogy is far from scientific or teach¬ 
ers would be able to do a better job in tapping the sources of 
interest and vigor. 

Old versus New Ideals in Business. The typical business of 
the familiar variety and the typical captain of industry of the 
older type laid stress solely upon profits for the managers and 
speculators. The traditional view of business has been that it 
took what it could from consumers and pinched employees 
whenever it was feasible. An air-tight monopoly of a necessity 
was the goal toward which all business men turned with longing 
eyes. The “go-getter’’ was an excellent representative of the 
old type of business man. 

But in recent years many types of large-scale industry have 
been passing out of the purely speculative, stock-market, ma¬ 
nipulative stage into a new phase in which emphasis is placed 
upon regular production for a reasonable profit from each unit 
of output. The business becomes primarily a productive enter¬ 
prise furnishing an article or service which consumers want, 
rather than primarily a speculative affair with production as a 
necessary accompaniment. Service becomes a watchword, and 
monopolistic manipulation is no longer utilized by the progres¬ 
sive, wider-market-seeking concerns. The management begins 
to perceive the wisdom of catering to wide markets and of 
studying methods of building up such markets. 

Production becomes the business goal. Low prices, small 
profits per unit, large outputs, and steady operation are the 
aims of the new type of business. The business administrator 
now strives to improve technical and personnel methods, reduce 
prices, and reach out for wider markets and new groups of con¬ 
sumers. If the market does not come to the new type of business 
man, he cuts prices and costs or improves the quality of the 


52 


ECONOMICS 


goods, and goes to the market. The workers are made to see 
that they can help to retain their jobs by reducing expenses 
and improving quality, and thus insuring a steadier market. 

Henry Ford has proved that it pays in certain kinds of busi¬ 
nesses to sell to the great masses of humanity, to lower prices 
until the common man is reached. Ford’s experience indicates 
that such a policy is more profitable than monopolistic restric¬ 
tion of output and high prices. Not only is Ford rich but he is 
also popular with the rank and file of American citizens. A 
presidential candidate is anxious to have his active support, but 
no presidential candidate of recent years has been eager to have 
the active and open support of the old-fashioned captain of 
industry whose idea of successful business enterprise was con¬ 
tained in a monopolistic wrapper. Of course the Ford plant is 
not making machines at or below cost; the profit-making motive 
is not absent. But the new type of business enterprise is being 
operated so as to emphasize increased production; restriction of 
output is placed in the background rather than in the fore¬ 
ground of the picture of business practices. Under the new type 
of business, profits come as the direct result of efficiency and the 
reduction of prices. This policy enables the enterpriser to reach 
new layers of purchasing power and permits large outputs. 
Under the old formula of business success, a profitable business 
was one which possessed monopoly power—restriction of output 
and exploitation—or speculative opportunities. 

A High Degree of Continuity. Furthermore, the old type of 
business placed little emphasis upon regularity of operation or 
continuity of service. The new type is making regularization 
of industry a goal. Workers are beginning to protest against the 
business manager who cannot regularize his business or dove¬ 
tail it with others. One of the reasons for asking for a share in 
management is the hope that greater regularity may be intro¬ 
duced as a consequence. The living expenses of workers and 
their families continue fifty-two weeks in the year; hence, the 
need of regular income. 

Undue optimism in regard to the newer tendencies in business 
should be avoided. However, this drift toward a new goal does 
not receive its impulse from altruism; the motive force grows 


NEW PROBLEMS IN BUSINESS 


53 


definitely out of the conditions under which large-scale and 
forward-looking businesses are today operated. It is pertinent, 
however, to inquire whether Ford’s views as to higher wages, a 
shorter working period, and wider markets are likely to appeal, 
for example, to the Pullman Company in its relations with the 
porters employed on Pullman cars? Will this newer goal look 
good to the manufacturer selling an article of luxury to cus¬ 
tomers not in the wage-earning group? One must be very opti¬ 
mistic to answer these questions in the affirmative. 

If, nevertheless, the new type of industrial management is 
beginning to place production paramount to selling and financ¬ 
ing, it is the trained engineer or the industrial-relations manager 
who will gravitate into the position of general manager. The 
engineer, unlike the financier, is interested primarily in product 
rather than in values, in output rather than in restriction of 
output and in scarcity. In the past, unfortunately, the econo¬ 
mist has too frequently joined hands with the financier, the 
profit maker, and the stock-market manipulator. In the future 
the economist is likely to find his place by the side of the crafts¬ 
man, the engineer, and the new type of business manager. When 
the engineer and economist join forces, a new era in industry 
will have opened. The fundamental business problems will be 
those of utilizing science and scientific methods in the industrial 
field instead of rule of thumb and guesswork, of substituting 
regularity of operation for irregularity, of replacing speculation 
and insecurity with investment and relative security, of insist¬ 
ing upon production rather than upon profits standards. 

The New Class of Business Managers. The day of the much 
praised, post-Civil-War captain of industry is rapidly passing. 
The typical, old-fashioned captain of industry was a self-trained, 
vigorous, ruthless, competition-crushing individualist. He 
gloried in fierce business rivalry and in his ability to get out of 
difficult and menacing business situations. The best representa¬ 
tive of the new type of business administrator that is being de¬ 
veloped is a well-trained individual. His strategy is not that of 
the self-reliant and defiant fighter; he emphasizes careful plan¬ 
ning, the council table, and the utilization of experience and 
science. The new type of business manager aims to avoid get- 


54 


ECONOMICS 


ting into desperate business situations. He considers himself to 
be a professional man with duties to perform in the interests 
of a three-fold chentele—investors, employees, and the consumer 
or, more broadly, the general public. “The administrative 
group finds itself in a pivotal position as the trustee of the prop¬ 
erty of investors, as the teacher and leader of the operative 
force, and as a delegate responsible for the preservation of cer¬ 
tain public interests.” ^ 

A new profession is in the making. This new, active manage¬ 
rial class may be expected in the future to stand midway be¬ 
tween labor and capital. The urge of dividends and the pressure 
of unionism do not directly and immediately touch the salaried 
technical expert. His interest lies primarily in good and efficient 
work under decent working conditions, in the quality of the 
output, and in the safety of the mills, mines, or railways under 
his control. His college training leads him to emphasize profes¬ 
sional ability and skill rather than mere money-getting and 
dividend-making. The business leader of the near future will, 
it seems safe to assert, be more than a well-trained man. He 
will also be in sympathetic touch with the workers in his plants. 
Such a man will possess the long-run point of view—the view 
of the industrial psychologist. He will be able to develop good¬ 
will among the workers. The new business leader will be a leader, 
not a driver, of men. The highest type of personnel director or 
executive will weld his organization into a cooperative unit 
able to do enthusiastic teamwork. It will not be a mechanical 
automaton actuated by the negative incentive of fear of losing 
jobs. 

Purpose in Industry. What are the goals of business in gen¬ 
eral or of a particular estabhshment? Is it the aim of a business 
to make profits, to produce a serviceable and needed product 
at a fair price, or to give employment to wage workers at fair 
wages and under good working conditions? There is no simple, 
dogmatic answer to these questions. Certainly an industry 
must make profits—get a larger return than it pays out in ex¬ 
penses—or it cannot long continue to serve either the commu¬ 
nity or the stockholders. Doubtless many business firms have 

1 Jones, E. D., The Administration of Industrial Enterprises, p. 9. 


NEW PROBLEMS IN BUSINESS 


55 


not formulated well-defined purposes; and different elements in 
a business, such as investors, active managers, skilled workers, 
and unskilled workers, will not agree as to goals. 

The aim of a highly speculative business will be very different 
from that of an old business which has regularized its method of 
operation. The latter will stress economical operating methods 
and service to its customers; the former will give little,considera¬ 
tion to these items. The long-run point of view in a business 
which is fairly well regularized is quite favorable to the inter¬ 
ests of consumers and of workers. To succeed, such a business 
must cultivate the goodwill of both customers and employees. 
From the long-run point of view it pays an industry to lay aside 
the let-the-buyer-beware attitude; it is not good business to 
allow workers to become suspicious of the management. 

In basic Industries the typical dividend return is diminishing 
as the risk decreases. Except in new and experimental indus¬ 
tries, the tendency is toward a standardized return. The specu¬ 
lative element is becoming less and less prominent. Great 
fiuctuations in business and an abundance of speculative op¬ 
portunities have caused an indifferent attitude toward ineffi¬ 
cient and careless management. ^‘The days of profit margins 
sufficiently wide to absorb the mistakes of faulty management 
are rapidly drawing to a close.” ^ With a standardized return, 
^‘the inhibition of a corporate bureaucracy” may disappear, and 
we may get the creative impulse into working order. On the 
other hand, regular and reasonable profits (dividends) for stock¬ 
holders—in case of actual investment—should be considered a 
charge upon the business and a factor in price-making. 

The workers in an industry are looking eagerly for as large a 
return as is possible with a reasonable amount of endeavor on 
their part and under fairly good working conditions, but they 
are also much interested in a steady job and in opportunity for 
advancement. And a large percentage of workers wish to do a 
worth-while job in an efficient manner. If the interest of the 
worker is not enlisted, he is absent in mind. Too many plants 
suffer high ‘‘absentia” and “dissatisfaction” costs which do 
not appear in their cost accounts. With expensive machinery 

^ Andersen, A., Management and Administration, February, 1926. 


56 


ECONOMICS 


and high overhead costs, the executive cannot afford to hire 
inefficient workers at low wages. To be successful, he must pay 
sufficient wages and maintain such working conditions as will get 
interested endeavor from skilled workers. The customers or the 
general public wish adequate supphes of goods, of good quality, 
offered at reasonably low prices. This large, but not well-defined, 
group is also interested in the regular and efficient functioning 
of business enterprises. 

Government in Industry. The amount of governmental inter¬ 
ference with industrial operations, as well as the danger of 
strikes, sabotage, and restriction of output by workers, depends 
in a very large measure upon the leaders in business. There will 
be little demand for government in business after business 
leaders accept the professional point of view. Less government 
in business cannot be obtained in these days of large-scale in¬ 
dustry and mutual interdependence by the mere expression of 
a pious wish or by passionate outbursts against would-be re¬ 
formers. It can be obtained as the result of the employment of 
better and more scientific business methods, by the develop¬ 
ment of associated effort actuated by a persistent attitude of 
regard for public or social welfare, and by careful and intelli¬ 
gent training in the field of business. 

America has outgrown the small-scale individual scheme of 
enterprise. Associated effort is now essential—of labor, of 
farmers, of professional men, of merchants, of manufacturers, 
of bankers. Either these associations must take on a professional 
ethics, look beyond purely material gain to actual service to the 
community, or we shall witness repeated and determined efforts 
looking toward bureaucratic control. The railways are now 
paying for their unsavory past in excessive regulation, and or¬ 
ganized labor is also paying for some of its unwise activities in 
injunction excesses. 

The alternatives seem to be: governmental bureaucracy and 
red tape or the development of healthy group ethics. Legislative 
and bureaucratic action is clumsy, but we shall have it in in¬ 
creasing amounts unless voluntary associations clean house 
and adopt the professional point of view. In the words of 
President Hoover, '‘when legislation penetrates the business 


NEW PROBLEMS IN BUSINESS 


57 


world it is because there is abuse somewhere.’^ If business organ¬ 
izations bend their efforts toward eliminating waste, reducing 
friction in industrial relations, obtaining serviceable output 
produced under decent working conditions for a reasonable 
profit, then, and only then, may they demand hands off indus¬ 
try and get the desired results. If they do not set their own 
homes in order, society is certainly going to attempt to perform 
the task.^ 

What does the professional point of view signify in the case 
of the business man? The physician is an excellent example of 
the professional man. The surgeon who advises that an opera¬ 
tion is unnecessary—although the patient would without ques¬ 
tion accept a verdict favorable to an expensive operation—has 
allowed his professional point of view and ethics to take prece¬ 
dence over the purely traditional business attitude. On the 
other hand, at the present time few business men would advise 
would-be customers not to buy their product until a future date 
or to take instead an article produced by another firm because 
by so doing the customer’s peculiar needs would be better 
satisfied. Salesmanship—particularly, high-pressure salesman¬ 
ship—means, too often, sell the article, persuade the customer 
that he needs it, be sure to get his signature on the dotted line. 
The automobiles sold on partial payments to many who ought 
to be dissuaded rather than persuaded are examples. 

The professional point of view in the case of business men will 
indicate more emphasis upon the needs and welfare of the buyer 
of the product and of the worker in shop, mine, or store. When 
the management of a business takes the professional point of 
view, it will not cater solely to the interests of the investor. 
The management will consider itself to be the representative 
of the buyer and of the worker in the service of the company, 
as well as of those who own stock. The manager of a business 
will aim to produce a serviceable product at reasonable prices, 
employing well-paid workers working in attractive and healthful 
workshops. The words reasonable and well-paid are ambiguous 
and subject to varjdng definitions, but it is not impossible to 

1 For further discussion, see Chapters on Transportation and on Public 
Utihties. 


58 


ECONOMICS 


attain a fair amount of agreement. Persons inclined toward 
pessimism will at once remark that the business man cannot 
take the point of view of the professional man. Business is 
business; it is not a profession and never can be. One answer is 
that the business man must be prepared to take a professional 
attitude or suffer very great interference on the part of govern¬ 
mental commissions and bureaus, or experience an increasing 
amount of governmental ownership and operation. 

One of the most significant movements in the world of busi¬ 
ness is the rapid development of schools of business adminis¬ 
tration in connection with our colleges and universities. It is 
true that many of these departments for business training do 
not as yet foster the professional spirit. It is quite true that 
many are not doing much but developing high-pressure sales¬ 
men and shrewd business men of the old-fashioned type who 
care little for the public or for the workers. But the future looks 
brighter. These schools presently will begin—are in fact begin¬ 
ning—to train a high and new type of business men with a 
social outlook, men who are able to see that the public and the 
worker cannot longer be safely disregarded, men who see the 
importance of industrial peace and harmony and the significance 
of science in industry. 

The politician and the engineer, or the trained business man, 
are very different. One is a master of speech and of emotional 
appeal; the other is a master of expert knowledge and of practi¬ 
cal application. The engineer, rather than the politician, should 
control industry. Again, the engineer, rather than the specu¬ 
lator, is demanded in business. Too many of our technical diffi¬ 
culties have come because our best brains were interested in 
speculation, because stock-market manipulation rather than 
technical principles has determined the course of business proce¬ 
dure. A marvelous advance in industry will come when labor, 
management, and investors actually cooperate, actually function 
harmoniously, actually work together as a team. Then there 
will be little need of governmental interference in business. 


NEW PROBLEMS IN BUSINESS 


59 


Questions 

1. Why do many workers “watch the clock’7 

2. Have you come into touch with new types of business men? 

3. What is the attitude of engineers toward restriction of output? 

4. What is their attitude toward waste and inefficiency? 

5. What is the purpose of the industry with which you are most 
familiar? 

6. Give illustrations of the professional point of view in busiuess. 

References 

Adams, J. T,, Our Business Civilization. 

Crecraft, E. W., Government and Business. 

Heermance, E. L., The Ethics of Business. 

Tead, O., Human Nature and Management^ Chs. 10-13. 


CHAPTER VII 


THE UTILIZATION OF COMMODITIES 

Production and Consumption. The purpose of production is 
to fashion commodities in the form wanted by the ultimate con¬ 
sumers, by everybody in the community, transport the commod¬ 
ities to the place where wanted, and furnish them at the time 
such articles are desired. Production is essentially a means to 
an end, and this end is the satisfaction of human desires. The 
purchasing decisions made by individuals for family use and by 
representatives of establishments utilizing consumption goods 
determine the direction of production. Men and women liter¬ 
ally decide in stores and market places what producing estab¬ 
lishments shall fashion, transport, and warehouse. Our “dollar 
votes” determine whether cotton or silk goods shall be pro¬ 
duced, whether suspenders or belts shall be fabricated, whether 
this kind of food or that kind shall be placed on the market, 
and so on through a long and ever-lengthening list of commodi¬ 
ties. The increasing income in the hands of the masses of the 
people in this country has led to a relatively slight increase 
in the demand for staple articles of food and clothing, and to a 
relatively great increase in the demand for articles of luxury 
or semi-luxury ranging from automobiles and radios to the 
movies and chewing gum. Mass production literally depends 
upon the purchasing power of the masses. 

Rational utilization of commodities and services is clearly 
as important as are efficient and scientific methods of produc¬ 
tion. It has been indicated that the conditions under which 
production must be carried on are in no small measure deter¬ 
mined by the purchasing demand, and in turn this demand is the 
result of our wants. The wise choice of commodities or the cor¬ 
rect expenditure of income affects (1) the direction of productive 
activities, and (2) the health and effectiveness of those who 
consume. 


60 


THE UTILIZATION OF COMMODITIES 


61 


In production, nearly all workers are specialists, but in the 
field of utilization of the results of productive effort, our wants 
and our purchases are becoming more and more varied. The 
work experience of men and women has been narrowed; but as 
consumers their opportunities to obtain a variety of commodi¬ 
ties have greatly increased. Production has also tended to be¬ 
come large-scale, but the typical purchase of goods continues to 
be small in quantity. More pride is exhibited in efficient pro¬ 
duction than in rational and scientific utilization of commodi¬ 
ties. The manager of a business and the skilled worker are 
usually proud of good work, but few indeed are those who mani¬ 
fest such a feeling in regard to the wise and healthful use of 
goods. But, it should be recalled, the opportunity to make a 
wise selection of goods is comparatively recent. It is the re¬ 
sult of increased productivity. 

The Art of Purchasing. As consumers, we are blundering 
amateurs. The art of purchasing has been accurately termed a 
‘^backward art'’; our purchasing methods are unscientific. Ex¬ 
cept in the case of purchases by large-scale businesses and gov¬ 
ernmental units, careful consideration and investigation are 
rarely made. The buying process for the average American 
family is carried out in a haphazard fashion. Little knowledge 
in regard to the relative importance of food stuffs in the diet 
of the family and also little accurate information as to the 
quality of the materials purchased are available. Usually no 
budget system has been planned. A business using such meth¬ 
ods would be in constant danger of a receivership. Neverthe¬ 
less, in the United States, comparatively little has been done 
to develop rational standards for family consumption. 

The average purchaser is without adequate guidance (1) in 
regard to what he actually needs, and (2) as to the exact in¬ 
gredients and quality of the articles under consideration. In 
fact, there are few standards by means of which a purchaser 
anxious to be guided toward rational consumption can ascer¬ 
tain what is and what is not rational utilization of commodi¬ 
ties. Even if these practical matters were put on a systematic 
and scientific basis, the art of purchasing could not be made 
scientific until after more is known about the process of mold- 


62 


ECONOMICS 


ing new habits and customs and about developing new states 
of mind in the rank and file of buyers. We buy many articles be¬ 
cause others are making similar purchases, in order to ''keep up"' 
with our associates and friends, because of our desire for display, 
or because a shrewd advertiser has played skillfully upon our 
fears, our emotions, or our desires for social prestige. 

A large fraction—perhaps, three-fourths—of the total expend¬ 
itures of the American family for household purposes is made 
by the housewife. All household purchases are, of necessity, 
small-scale. Day after day decisions must be made as to the 
expenditure of the limited family income for necessities and 
luxuries. The modern store with its up-to-date advertising con¬ 
stantly presents a "series of temptations to buy this, that, or 
the other thing.” The housewife untrained in the art of pur¬ 
chasing and usually unschooled in household economics is 
brought face to face with the highly developed art of advertis¬ 
ing and of high-pressure salesmanship. Inevitably, the house¬ 
wife and other small-scale purchasers make serious mistakes. 
Those of us having small or moderate incomes need training in 
the practical art of buying; we need to learn how to resist the 
wiles of advertisers and salesmen, how to combat the strategy 
of the market. 

The arrangement of the tempting array of foods in a cafeteria 
and the location of different departments in a store are carefully 
calculated to furnish the maximum temptation to the patron. 
The arrangement is designed to provide a potent appeal through 
the eye of the individual; it is a direct form of advertising. One 
writer suggests that "Epicurus would have been tempted to 
unwisdom” in the up-to-date cafeteria. The store is today a 
warehouse in which are displayed an interminable variety of 
articles artfully arranged so as to lead to the maximum amount 
of sales. The endless columns of skillful advertising and the 
psychologically directed plans of the salesman continually bom¬ 
bard the easily bewildered and inexpert purchaser. 

Furthermore, our purchasing habits or the demands of con¬ 
sumers are in a large measure the resultant of a curious com¬ 
bination of individual idiosyncracies, tradition, community 
fads, and social pressure which causes us to conform to the usual 


THE UTILIZATION OF COMMODITIES 


63 


standards of family, class, and nationality, and which makes 
us the easy victims of the skillful propaganda of advertisers 
anxious to sell more of their product. Demand is often influ¬ 
enced by a multitude of social and psychological forces almost 
wholly independent of prices. The consumer is subjected to a 
multitude of pushes and pulls. “Economics has too often over¬ 
simplified the consumer’s psychology.” According to Professor 
Edie, ^The science of spending money becomes in the deepest 
sense an economic study of values and standards of the civiflza- 
tion of a certain day and age.” 

The art of purchasing can only be made scientific after we 
have exact knowledge of the quahties and type of goods needed, 
and after we learn how to mold habit and custom and how to 
develop new states of mind. It has been suggested, for example, 
that if the state of mind could be modified so that any con¬ 
siderable deviation from the normal in dress on the part of 
women would be considered as an effort to conceal physical un- 
lovehness, emphasis upon fashion in the dress of women would 
disappear. The business man, through his advertising and 
high-pressure salesmanship, creates a state of mind favorable to 
the purchase of his products. There is unfortunately no group 
financially interested in protecting the unorganized consumers. 
Perhaps, it is an appropriate governmental function to aid in 
creating the state of mind which will reduce unwise and irra¬ 
tional purchases on the part of the rank and file of small pur¬ 
chasers—the consumers. 

Waste. Progress is movement toward the “ rational organi¬ 
zation of human society.” The history of progress is a story of 
diminishing waste in both production and consumption. Ra¬ 
tional utilization of materials and forces must go hand in hand 
with efficient production. There are two varieties of efficiency 
which should be clearly distinguished: industrial, and welfare 
efficiency. The former relates to the production of goods and 
services with the least possible expenditure of time and energy. 
From the standpoint of welfare efficiency the additional ques¬ 
tion may be asked: Is the service worth doing even if performed 
in an efficient manner? Wasteful consumption signifies mis¬ 
directed efforts in production. Certain sorts of products degrade 


64 


ECONOMICS 


not only the consumer but also the producer. Certain highly 
desirable products are produced under conditions which degrade 
the great mass of workers employed in such producing establish¬ 
ments. Individuals degenerate and die prematurely because 
their wants are improper; likewise nations have decayed because 
of the unwise wants of the people. In modern interlocking and 
complex civilization it is highly important that the consump¬ 
tion of individuals be not destructive or degenerative, and that 
our productive energies be directed toward doing worth-while 
kinds of work. From one point of view, progress means educat¬ 
ing people to want things which are clearly good for them, and 
which do not involve degradation for the producers. In so far 
as it is feasible, men and women should be educated to demand: 

(1) things which are beneficial to consumers and to society; and 

(2) things which can be produced without great social waste, 
(a) of materials, and (6) of human beings engaged in productive 
effort. This would call for a careful analysis of wants and of 
the methods of changing human desires. It demands much 
further study of production processes, of economical market¬ 
ing, and of efficient utilization of consumable goods. It is indeed 
a difficult educational project. 

Many analyses of waste in the production and utilization of 
commodities have been made. The following, differentiating 
waste into four major classes, is perhaps as clear and complete 
as any. 

1. Waste of Fixed Assets. Certain industries are over-devel¬ 
oped. As a consequence, except in times of extraordinary de¬ 
mand, the industry does not run up to its maximum. Portions 
of its machinery and buildings are not utilized or are only 
partially utilized. Badly located plants are often closed down 
fully or partially. The soft coal industry is an example of over¬ 
organization or of uncoordinated growth. The investment of 
capital is too large to permit continuous operation. During the 
thirty years preceding 1921, according to a careful student of 
the industry, the men and equipment were idle on the average 
ninety-three days per year. There is no good reason for believ¬ 
ing that any considerable improvement has taken place in the 
soft coal fields since that date. The Committee on the Elimina- 


THE UTILIZATION OF COMMODITIES 


65 


tion of Waste in Industry of the Federated American Engineer¬ 
ing Societies estimated that the waste due to idle machinery and 
men in the metal trades industry amounted to nearly one billion 
dollars annually. Over-development is almost typical of Ameri¬ 
can industries. Over-development means high overhead or con¬ 
stant expenses for which finally the consumer pays in higher 
prices and in reduced real income. 

2. Waste of Materials, Much material is wasted within manu¬ 
facturing plants as the result of carelessness, haste, and ineffi¬ 
cient methods. The waste of materials and resources in coal 
and oil fields, in metal mines, in forestry, and in other sorts of 
extractive industry are enormous in sum total. The losses are 
due to imperfect technical methods and to the desire to make 
immediate profits at the expense of conserving natural resources. 
The Department of Agriculture several years ago estimated 
that over one-third of the timber resources in the United States 
was wasted by leaving part of the timber on the ground, by the 
failure to utilize by-products, and because of inefficiency in the 
mills. A large fraction of our oil resources has been wasted— 
much has been left in the ground, new wells have not been 
brought under control until much oil is lost, much wastage has 
taken place in storing, transporting, and refining the oil, and, 
finally, the methods of utilizing petroleum products have been 
inefficient and wasteful. Practically the same story may be told 
in regard to soft coal. Our soil fertility has been and is being 
wasted as the result of poor agricultural methods and of floods 
which denude the land and carry the elements of fertility away. 

3. Waste of Man-Power. Enormous losses of man-power are 
due to a great variety of causes. Even in times of prosperity 
large numbers of men are unemployed. In times of depression 
it is estimated that the total of the involuntarily unemployed 
in the United States has risen as high as four to six million. In 
addition there may be mentioned the idle rich, the tramp, the 
bum, the criminal, and the gambler. These elements make up 
a vast, changing, and heterogeneous army of non-productive 
men and women who might be producers. Excessive labor 
turnover, the rapid drift of workers in and out of industrial 
establishments, wastes much man-power. Voluntary absentee- 


66 


ECONOMICS 


ism adds to this total. Strikes, lockouts, and especially the 
sabotage and slowing down due to bad human relations within 
industry, contribute to man-power waste. These hidden losses 
resulting from friction between management and men are far 
more important as a source of waste than the more evident and 
spectacular flare-ups in the form of strikes and lockouts. 

Accidents, sickness, premature disability, occupational mis¬ 
fitting, and lack of interest in the job swell the dark stream of 
wasted man-power. Finally, the attention may be directed to 
the indirect wastes due to producing adulterated, useless, and 
harmful products—illth—, to those due to the use of anti¬ 
quated machinery or methods, and to insanitary or badly lighted 
and ventilated work places. Stuart Chase estimated a few years 
ago that over one-half of our potential man-power is wasted. 

4. Waste in the Field of Distribution. In marketing, waste 
arises because of excessive competitive advertising and sales¬ 
manship. Too many retail stores doubtless exist for the most 
efficient distribution. These stores warehouse unnecessarily 
large amounts of idle merchandise; and ^‘idle merchandise 
accumulates a burden of interest, insurance, rent, taxes, de¬ 
preciation, shrinkage, and obsolescence, in addition to t 5 dng up 
an unnecessary amount of capital and credit.^’ Unnecessary 
and slow transportation is costly. According to an industrial 
engineer. Basset, it costs more to move a parcel from a New 
York dock to an uptown warehouse than to bring it from China 
to the dock. The jam of vehicles in the streets of New York is 
costly. Vehicles which do more waiting than working are per¬ 
force expensive and inefficient. Breakage, freezing, spoiling, 
general deterioration, excessive costs of delivery, and the like, 
are among the other important wastes in the marketing process. 

The famous report on Waste in Industry j sponsored by the 
Federated American Engineering Societies, classified waste 
imder four headings: Low Production caused by faulty manage¬ 
ment of materials, plant, equipment, and men; Interrupted Pro¬ 
duction caused by idle men, materials, plants, and equipment; 
Restricted Production intentionally caused by owners, manage¬ 
ment, or workers; Lost Production caused by ill health, physical 
defects, and industrial accidents. 


THE UTILIZATION OF COMMODITIES 


67 


Waste and Real Income 


Professional 

Workers 


Personal 

Servants 


Governmental 

Employees 


Bankers 


N f 


Extractive Industries 
Farming Mining Fishing Lumbering 

1 1 , 

Transportation and Communication 

1 1 

Manufacturing Industries 

1 

Transportation and Communication 

1 1 

Wholesale and Retail Establishments 

Transportation and Communication 


Total Income of the Community 

Food, clothing, shelter, education. 

Capital Goods 

recreation, medical services, etc. 

(New and re¬ 

(Necessities, comforts, luxuries) 

placement) 


The chart above pictures the functions of the forty-odd millions of 
gainfully employed that constitute the working force of the United 
States, considered as a gigantic establishment with a raw material, a 
manufacturing, a sales, and a transportation department, and with 
a large number of professional workers, governmental employees, and 
other groups furnishing services. The income of the nation is the re¬ 
sult of their combined efforts. 

The chart above may be used to make clear the intricacy 
of the business mechanism which produces the great flow of 
goods and services that constitute the real income of the nation. 
It may be noted that savings in the form of new buildings, 
equipment, and other sorts of capital goods cause the immediate 











68 


ECONOMICS 


reduction of the flow of consumable goods and services. As a 
consequence, however, more equipment is available for use in 
industry with the possibility of increased future productivity 
and increased consumption of goods and services. The chart 
also shows how man-power and fixed assets may be wasted. 
Any case of low, interrupted, restricted, or lost production re¬ 
duces the flow of goods and services to the community. A revolu¬ 
tion or any significant change which interferes with the regular 
and smooth fiow of consumable goods and services becomes a 
very serious menace in an interlocking civilization. It is much 
more serious in a highly developed country than it would be in 
a country like Russia which is industrially backward. Business 
in an interlocking civilization like ours is more of a cooperative 
than a competitive affair. If a reduction in purchasing occurs, 
this in turn checks productive activity. Today production is 
actually carried on chiefly in anticipation of wants backed by 
purchasing power. A mistake means financial loss. 

Responsibility for Waste in Industry. The Federated American 
Engineering Societies in their famous investigation into Waste in 
Industry studied in some detail six industries—the building 
industry, the men’s clothing industry, shoe manufacturing, 
printing, the metal trades, and textile manufacturing. While 
the chief aim of the investigation and report was to discover 
the causes of waste in industry and to direct the attention to 
plans for the reduction of such losses, an interesting attempt 
was made to assign responsibility for waste in the six industries 
investigated. The following table presents the findings. 


INDUSTRY STUDIED 

MANAGE¬ 

MENT 

LABOR 

OUTSIDE 

CONTACTS 

Men’s Clothing Manufacturing 

75% 

16% 

9% 

Building Industry 

65% 

21% 

14% 

Printing 

63% 

28% 

9% 

Boot and Shoe Manufacturing 

73% 

11% 

16% 

Metal Trades 

81% 

9% 

10% 

Textile Manufacturing 

50% 

10% 

40% 


It is interesting and instructive to note that this study made 
by engineers places the responsibility for wasteful practices in 
manufacture largely upon the shoulders of management, ranging 


THE UTILIZATION OF COMMODITIES 


69 


from 50 per cent in the textiles to 81 per cent in the metal 
trades. Labor’s responsibility, on the other hand, is rated as 
ranging from 9 per cent to 25 per cent. The report rightly 
insists that ‘Tt must be recognized that if management is to 
meet this responsibility fully it must have the cooperation of 
labor.” ^ The fickle changes in demand on the part of the 
buying pubUc are the cause of a considerable fraction of the 
waste charged against the public. The Department of Com¬ 
merce, in the years which have intervened since this study was 
made, has pushed with encouraging results a campaign for 
simplification—that is, for a reduction in the number of varieties 
and styles produced of a given product. Possibly the govern¬ 
ment should be encouraged to assume a more positive role. Our 
legislative bodies pass laws to prevent adulteration, to reduce 
waste through insanitary conditions and unsafe conditions in 
factories. Is it not as important that society take steps to pre¬ 
vent inefficient management in an important business enter¬ 
prise? 

The Cost of Living. By the cost of living is ordinarily meant 
the monetary cost of procuring the goods and services which 
are purchased for personal or family utilization. Practically 
every family is much interested in price fluctuations and in 
changes in the cost of living. The best and most complete sta¬ 
tistics in regard to changes in the cost of living in this country 
are those issued by the Federal Bureau of Labor Statistics. In 
1918 to 1919, the Bureau made a careful study of 12,096 fam¬ 
ilies of workingmen in 92 towns in 42 states. The yearly in¬ 
come of these families ranged in nearly all cases from $900 to 
$2,500 per year. On the average these families spent 38.2 
per cent of their total yearly expenditures for food; 5.2 per 
cent for light and fuel; 16.6 per cent for clothing; 13.0 per cent 
for rent; 5.1 per cent for furniture and house furnishing; and 
21.3 per cent for miscellaneous items, including doctor’s and 
dentist’s fees, newspapers, car fare, movies, laundry, tobacco, 
toilet articles, etc. The families with higher incomes spent a 
smaller percentage on food and a larger percentage on miscel¬ 
laneous items than did those receiving a lower yearly income. 

^ Waste in Industry^ p. 9. 


70 


ECONOMICS 


New studies of family budgets are needed. Radical modifica¬ 
tions in the diet and in housing requirements of the American 
people have taken place since 1918-1919, and certain types of 
expenditures that were unusual or unknown at the earlier date 
are now customary. 

This average budget has been used by the Bureau as a basis 
for determining changes in the cost of living. Statistics are 
gathered regularly as to the retail prices of forty-three different 
food items in half a hundred cities and towns. The changes in 
the price of each article of food are recorded. Care is exercised 
to make certain that articles of similar grade and purity are 
priced in the different cities and in different years. Each article 
is given a weighting or importance equal to that found in the ac¬ 
tual average budget of the 12,096 families. A similar calculation 
is made for clothing, shelter, etc. In this way the relative 
changes in the price level of each of the six groups are obtained. 
The six classes in the budget are then weighted in accordance 
with their respective importance in the budget as determined in 
the Bureau’s original investigation. Foods are given a weight 
of 38.2, and miscellaneous items, 21.3. By this use of a series 
of weighted averages, the relative cost of living is obtained for 
different years. The year 1913 is usually taken as the basis of 
comparison and is given the index number of 100. If the index 
number for June, 1926, is 174.8, it indicates that the cost of 
living in June, 1926, had risen 74.8 per cent above that of 
the year 1913; or, on the basis of this calculation, $1,748 
was required in June, 1926, to purchase as much of food, 
clothing, shelter, etc., in the workingman’s budget as $1.00 
would have purchased in 1913. Index numbers, used by stat¬ 
isticians, do not record actual costs; they represent relative 
costs. 


Cost of Living in the United States 
(According to the U. S. Bureau of Labor Statistics) 


Year 1913 

100 

June 1927 

173.4 

June 1920 

216.5 

June 1928 

170.0 

June 1924 

169.1 

June 1929 

170.2 

June 1926 

174.8 

June 1930 

166.6 


THE UTILIZATION OF COMMODITIES 


71 


June, 1920, represented the peak of prices in recent decades. 
It required over two dollars to buy as much as one dollar would 
obtain in 1913, of the composite budget of the workingman. 
By June, 1929, the price level and the cost of living had dropped 
considerably below the peak, but the cost of hving was 70 per 
cent above the pre-War year of 1913. Furthermore, a dollar in 
1913 would purchase less than the 1896 dollar; or the cost of 
hving was lower in 1896 than in 1913. Barring a great war or 
some unexpected upheaval, there is reason to expect prices and 
the cost of living to tend slowly and irregularly downward rather 
than upward during the next decade. 

A Decent Standard of Living. Standards of living vary from 
group to group and from country to country. The standard of 
hving of the skilled worker differs from that of the common la¬ 
borer. The professional man and the farmer do not maintain 
the same standards of hving. The wage workers often contend 
that wages, should be high enough to enable a family to main¬ 
tain ‘^a decent standard of hving.However, there is marked 
disagreement as to what exactly constitutes the budget of a 
family hving on such a standard. In 1919, the United States 
Bureau of Labor Statistics presented a tentative budget. The 
Bureau held that this budget represented the items necessary 
to maintain a family of five in Washington, D. C., at a level 
of health and decency. The budget called for an expenditure 
of $2,262.47 per year. This amount, it was asserted, would pro¬ 
vide sufficient nourishing food, a house in a low-rent neighbor¬ 
hood, the upkeep of the household equipment, and provide 
warm and adequate clothing. Allowance was made for doctors 
and dentists, recreation, union dues, church attendance, and 
incidentals. In 1929, the Associated Charities of a Nebraska 
city announced a budget for a family of five. This required ap¬ 
proximately only $1,350 per year. No allowance was made for 
recreation, dentistry, church or charity, reading, or vacations. 
Evidently such a budget represents an absolute minimum cost 
of living, or less. 

Welfare and Income. Economic progress involves improve¬ 
ment in organization on the side of the utilization of commodities 
as well as in production and transportation. Human welfare is 


72 


ECONOMICS 


not assured by the receipt of a large income. Welfare demands 
the intelligent direction and organization of material and eco¬ 
nomic forces. “It is only by becoming wise choosers, wise 
spenders, and wise users that the vast potentialities that lie in 
the increased productiveness of economic machinery can be 
transformed into the realities of human progress.”^ What is 
the type of life and of living which makes for national well¬ 
being? What is the “good American life’’? The difficulties in¬ 
volved in answering these questions may be made clear by ask¬ 
ing a series of questions. 

Does the good American life mean a Ford and a high-school 
education? Does it require a Dodge and a college education? 
Or, must it be accompanied by a Cadillac and leisure? Is it the 
simple life—“three acres and a cow”—or are steam heat, electric 
lights, running water, and a chauffeur essential? Is the good 
American life possible without a large income and a high- 
powered car? Is the frugal individual who practices thrift liv¬ 
ing the good American life or is it lived only by the generous 
spender who cares little for the morrow? 

Is the good life to be found in working regularly for a fairly 
adequate wage? Is it one in which a person idles, dreams, medi¬ 
tates, hunts, plays, and works occasionally? Is the good life 
lived by a migratory worker who rides the bumper of a freight 
train or drives a second-hand automobile between jobs? Daniel 
Boone was a migrant. Did he live a good life? Or, is it lived 
by the high-powered executive who rides in the Pullman or the 
airplane and lives in expensive and fashionable hotels? Or, 
again, is it lived by the routine worker who owns a small cottage 
at the edge of town and who never wanders far from his fireside 
and workshop? Do those living the good American life begin 
and stop work when they “feel like it” or are punctuality and 
regularity essential? 

Is such a life connected with a short working day and waste¬ 
ful expenditures? Does it involve a college course, membership 
in a fraternal organization, a minimum of hard study, golf, 
bridge, membership in a club, frequent vacations? Is it con¬ 
nected with oft-repeated expenditures for tobacco, soft drinks, 

1 Tugwell, R. G., and others, American Economic Life, p. 449. 


THE UTILIZATION OF COMMODITIES 


73 


cosmetics, shampoos, manicuring, athletics, jewelry, autos, and 
radios? Can our comfortable classes be too comfortable for a 
good life? Do Americans in 1930 expect too much to be done 
for them? Are we becoming too dependent upon personal serv¬ 
ice, upon trustees and trust companies, upon solicitors and 
mechanics? Did the self-rehant pioneer live the good life? Is 
life today too soft? 

Should the man who wishes to live the good American life 
follow the crowd or should he leave the beaten path? Does that 
life require one to follow in the traditional ways of the fathers 
of the nation or does it mean a course lighted by the lamp of 
the question mark and of rational investigation? Is the good 
life lived by the heretic, the radical, the progressive, or by the 
conservative and the conformist? Does it or does it not demand 
constant adaptation to new and changing conditions? Can the 
good American life be lived in a welter of peoples, classes, be- 
hefs, and customs or, before any one can live such a life, must 
our diverse groups be assimilated and reduced to a common 
denominator? Is the good American a talker or a doer? Is he 
preacher, business man, farmer, idler, engineer, politician, 
dreamer, or production expert? 

Are plain living and high thinking the goals of the man liv¬ 
ing the good American life? If so, how large a percentage of 
Americans are actually tr 3 ung to reach these goals? Do high 
living and high thinking go hand in hand? Is the good American 
life one of contentment or of striving? Is contentment a ‘^mild 
form of decay’’ or is it the ideal goal of life? Are “successful” 
men and women those who live the good American life? What 
determines whether a man has or has not achieved success? 

Finally, if it were possible to decide definitely what constitutes 
the good American life, who would be the leaders in inducing 
the American people to live after that fashion? What arts of 
persuasion may be successfully used? Can people be induced 
to live well by teaching, by precepts, by preaching, or by ex¬ 
ample? Who knows? Science as yet seems to vouchsafe no 
clear and definite answers to these questions. 


74 


ECONOMICS 


Questions 

1. “We spend more in trying to live like our neighbors than in trying 
to live comfortably/’ Do you agree? Why? Give illustrations. 

2. How would you measure welfare? 

3. Present a plan for the reduction of waste in production. 

4. Present a plan for the reduction of waste in the consumption of 
commodities. 


References 

Nystrom, P. H., Economics of Fashion. 

PiGOU, A. C., Economics of Welfare. 

Recent Economic Changes, Vol. I, Ch. I. 

Waite, W. C., Economics of Consumption. 

Waste in Industry (Report of Federated American Engineering Socie¬ 
ties). 


CHAPTER VIII 


VALUE AND PRICE 

Exchange Value and Price. The business man is interested 
only in producing material commodities or services which may 
be sold at a price or which may be exchanged for other com¬ 
modities or services. Such commodities and services are called 
economic goods or goods which possess value in exchange. All 
economic goods possess the quality of satisfjdng the wants or 
desires, good, bad, or indifferent, of human beings; such goods 
are said to possess utility. In addition, economic goods also 
exist in quantities insufficient to satisfy all demands or desire 
for the good; in other words, economic goods are scarce. An 
economic good is, therefore, characterized by utihty and scar¬ 
city; it is valuable. The value in exchange, or the value, of a 
good is the importance of that good in terms of some other 
good; value is always a ratio. One bushel of wheat exchanges 
for two of oats. The exchange value of wheat in terms of oats 
is 2:1. However, goods and services are rarely exchanged or 
bartered directly for other goods and services. They are in¬ 
directly compared in terms of money. Wheat and oats are com¬ 
pared in terms of money rather than in terms of each other. 
Each is given a price. In the market, all commodities are given 
prices. Price is merely one form of exchange value. The price 
of an article is its exchange value in terms of the monetary unit. 
In this country, price is the exchange value of an article in 
terms of the weight of gold in the standard dollar. When the 
exchange value of wheat in terms of oats is 2:1, the price of 
wheat may be $2.00 per bushel and that of oats, $1.00 or the 
prices may be $1.00 and $0.50. 

The word value or the phrase value in use is often used to 
connote the importance placed by an individual upon a particu¬ 
lar commodity or service, or what a group or an individual 
believes should be the price. It appears that this concept of 

75 


76 


ECONOMICS 


value in use differs little from that attaching to utility. To 
assign an importance or value to goods which varies from that 
which the market assigns, takes us out of the field of economics 
into that of ethics. In economics we take human beings as they 
are with their peculiar wishes and frailties. This does not mean 
that economists are not interested in human welfare and social 
and individual betterment, but it does signify that they analyze 
today’s conditions on the basis of actual, imperfect men and 
women. The economist’s interest is in the problems of market 
price. 

Normal Price. It is as a rule assumed that under competitive 
conditions prices tend to equal the expenses of production. Nor¬ 
mal price is said to equal the expenses of production. Monopoly 
price is considered to be an exception to the rule. Under non- 
monopolistic conditions, it is asserted, market price may rise 
above or fall below the normal price level but the constant 
tendency is for the two to coincide. As a matter of fact, com¬ 
petition does not work so smoothly as economic theorists assume. 
Interferences appear on every hand—agreements, combination, 
new and suddenly modified demand, favoritism, monopoly, 
governmental regulation, etc. It may be desirable to consider 
what would happen if there were free competition for the same 
reason that the physicist studies the rate at which bodies would 
fall in a vacuum. Falling bodies are never in a vacuum and 
business is never under conditions of absolutely free competition. 
We should not forget that free competition is as difficult to 
discover as the sea level of an ocean of restless waves and 
constantly moving tides; it is a figment of the imagination. 

Monopoly, partial or complete, means an interference with 
the operation of competition. Changing industrial conditions 
also interfere with the competitive process and give rise to 
extraordinary profits. All products which cannot be reproduced - 
are not subject to the theoretical rule in regard to normal price. 
Their prices depend upon the supply in existence and upon the 
intensity of effective demand for them as, for example, in case 
of the paintings of a great master of the Middle Ages or as in 
the case of land. Products which are produced in a discontinu¬ 
ous manner sell at prices which are not equal to the expense of 


VALUE AND PRICE 


77 


production. The price of wheat in the spring does not usually 
bear a close relation to its expense of production. In like man¬ 
ner, an article produced months before it is sold will frequently 
be sold at prices above or below the expenses of production. If 
the price is equal to any expense of production, it is the expense 
now of producing a similar article. Highly perishable articles 
must frequently be sold at a price far below expense of produc¬ 
tion. 

In fact only in an unusual or hypothetical case does market 
price bear any direct relation to the expense of production. 
Theoretically, goods would normally sell at their expense of 
production only under the following extraordinary circum¬ 
stances—if competition were free, if the product were freely 
and continuously producible, if the demand for it fluctuated 
but little and the methods of production were well standard¬ 
ized, and if it were sold to the ultimate consumer immediately 
after the process of production was finished. In actual practice, 
unless attempts are made to fix or regulate prices, the price of 
an article or service tends to equal ^^what the traffic will bear^^ 
with profit to the producer. It is what sellers can get and con¬ 
sumers will pay. A business which expects to continue year 
after year and which takes the long-run point of view will often 
sell below the price which will give immediate maximum re¬ 
turns with a view to a greater volume of business later. Market 
price is the result of a bargain often made under circumstances 
unfavorable to either buyer or seller. 

Supply and Demand. In the business world demand for a 
commodity is desire backed by purchasing power; it is the quan¬ 
tity which will be purchased at a given price. Mere desire does 
not necessarily constitute demand. A man with a small income 
may desire an expensive automobile, but his desire will not be 
translated into effective demand because it is unsupported by 
adequate purchasing power. Demand varies also with the price 
of the commodity. The demand for a particular type of foun¬ 
tain pen will be different at a sale price of $5.00 than at one of 
$7.00. In like manner, supply is the amount of a commodity 
which will be offered for sale at a given price. The supply which 
will actually be placed on the market, however, is not independ- 


78 


ECONOMICS 


ent of the amount of reserve stocks. Reserve stocks consist of 
(1) partially finished goods, (2) goods held in warehouses and 
other storage places in anticipation of higher prices, and (3) po¬ 
tential supply or a supply which might be made if the market 
price warranted. Supply, fike demand, is an amount which will 
be placed on the market at a given price. A market price is 
the price at which the amount placed on the market equals the 
amount purchased. In short, at a given market price, demand 
and supply are equal. 

Wide variations exist in the demand for commodities. Men 
with large incomes will buy certain necessaries whether the 
market price be high or low. Others must exercise great care 
in making a small income suffice for the necessities of life. De¬ 
mand for a given article varies from individual to individual and 
from place to place. Lowering the price ordinarily allows the 
sellers to reach new groups of purchasers. The desire of an 
individual for any given article changes with fashion, advertis¬ 
ing, and the presence or absence of suitable substitutes. It 
also diminishes ordinarily as more and more units of the com¬ 
modity become available for utilization. In technical termi¬ 
nology this tendency is called the “law of diminishing utility.’^ 
The desire of a person for a commodity may easily be satiated, 
but the demand of the normal person for all kinds of goods is 
never satiated. New wants and desires arise as older ones are 
satisfied. 

Demand for a commodity is said to be elastic when the total 
amount demanded—purchased—increases rapidly as the price 
lowers or decreases rapidly as the price is raised. Inelastic 
demand is found when the amount of a commodity demanded 
does not vary greatly as the price rises or falls. No commodity 
is absolutely elastic or inelastic. In general, the demand for a 
necessity—unless there is a good substitute for it—is said to 
be inelastic. The demand for comforts and luxuries is relatively 
elastic. Inelasticity of demand tends to result in extreme fiuctu- 
ations in prices if the supply offered on the market changes. 

The total supply of an article placed on the market is ordi¬ 
narily made up of parts produced at different costs. One estab¬ 
lishment furnishing a portion of the supply is able to keep costs 


VALUE AND PRICE 


79 


of production low; others produce at higher costs. Some may 
make large profits; other concerns may be on the verge of 
bankruptcy. If the price of a commodity placed on the mar¬ 
ket by several competing establishments rises, these establish¬ 
ments may increase their output or new producers may enter 
the field. If an old producer increases his output, it may be 
under conditions of increasing, decreasing, or stationary costs. 

A condition of increasing cost of production is met with when 
it becomes more difficult and expensive to obtain raw materi¬ 
als, when less efficient workers must be used, when land must 
be utilized too intensively for the best results. Farming and 
the retail store business are good examples of industries which 
soon reach a condition of increasing costs with increasing out¬ 
put per business unit. Usually, competition between relatively 
small firms is not easy to stifle; there is little incentive toward 
large-scale industry and toward monopoly. On the other hand, 
railway and electric power plants are businesses of decreasing 
expenses of production—until very large business units are 
assembled. The manager of an industry which has not as yet 
reached the point of minimum cost per unit of output is under 
temptation to increase his output. If several competing com¬ 
panies are in the same condition, the tendency, in the absence 
of regulation, is to increase output, to enter an era of fierce or 
cut-throat competition. Competition between such businesses 
does not work smoothly. Finally, combination and monopoly 
result. Businesses of high fixed expenses or overhead costs are 
of decreasing costs until the size of the business unit becomes 
large. A large-scale business may actually increase profits by 
reducing prices, selling more, and producing more at lowered 
costs. The difference between a business of increasing costs 
and one of decreasing costs is a matter of degree. Certain busi¬ 
nesses reach the point of maximum efficiency—lowest cost of 
production—while small-scale; others only after a large output 
is reached. A business of fairly constant costs is ordinarily one 
in which hand labor is an important factor. Such industries are 
relatively of little importance. 

Competition. Competition in the world of business has sig¬ 
nified a condition in which several sellers offer goods in a mar- 


80 


ECONOMICS 


ket without agreement or manipulation on their part, and in 
which several buyers are eager to purchase the commodity 
offered. Free competition has been praised since the days of 
Adam Smith as ‘Hhe life of trade.^’ It has been urged that 
competition will lead to the business survival of the best firm 
or firms. The concern, it is asserted, producing the best quality 
of goods at the lowest costs will live and grow, and the ineffi¬ 
cient and dishonest firms will be forced to the wall. In this man¬ 
ner society and the efficient producers will benefit. It is assumed 
that consumers will be able to distinguish the quality of goods 
and will always take only the type of article which offers ^‘the 
most for the money.” In actual practice, in these days of 
skillful advertising and ease of adulteration, it seems clear that 
the advantages of free competition may easily be exaggerated. 
Business men are prone to decide that competition means for 
them ‘‘a dearth of profits.” As a consequence, competing busi¬ 
ness units often make agreements and form pools, combina¬ 
tions, trusts, holding corporations, institutes, or some other 
form of organization in order to protect themselves from the 
play of free competition. However, even the most pronounced 
advocates of the virtues of free competition presuppose a cer¬ 
tain amount of legal regulation which is aimed to prevent un¬ 
desirable forms of rivalry, which will eliminate “jungle com¬ 
petition.” The existence of private property rights and the 
enforcement of valid contracts are taken for granted. 

Cultivation is the restraint of competition in the vegetable 
world by agriculturists, but the competitive principle is re¬ 
tained on a different and higher level. Domestication of ani¬ 
mals means the removal of certain kinds of competition, but 
again strenuous competition still persists. The wild grape is the 
product of unregulated competition; the Concord of regulated 
competition. Regulation eliminated the unfit and the enemies. 
Custom speUs restraint of competition in industry. When prices 
were fixed by custom, price-cutting could not occur, but com¬ 
petition as to quality might be active. The rules of the game 
destroy certain forms of rivalry, but competition and rivalry 
actively continue within certain well-defined limits. The prize 
fighter may not strike below the belt, but no one doubts that 


VALUE AND PRICE 


81 


active rivalry and competition, within prescribed limits, are 
found in the ring when two pugilists meet for an encounter 
under the usual rules. The football game presents a case of 
regulated competition. 

Monopoly and special privileges place limits to the play of 
competitive forces. Inheritance and private ownership of land 
and of the instruments of production also fix limits. The vital 
problem relates to the '‘just’' and "fair” limits to competition. 
What are the correct rules of the competitive game? This is 
comparatively easy to answer in regard to wheat growing or 
stock breeding, but it becomes a very difficult matter if appli¬ 
cation is made to human society. Different classes and condi¬ 
tions of people return radically different answers. Competition— 
rivalry—is everywhere. Socialism cannot, does not aim, to do 
away with competition. Leaders and followers there must ever 
be. Some must play one part and others very different roles. 
Not everyone can occupy the front seat. Both competition and 
cooperation are essential to good teamwork. While picking the 
team, competition is primary; later, cooperation is. Legal en¬ 
actments may change the form of competition and set new 
bounds within which it may operate. Monopoly does away 
with "jungle competition,” but substitutes restricted or "un¬ 
fair” competition. Bitterness and hatred normally arise in the 
case of unfair competition, but not in the case of regulated 
competition. We do not hate the opponent who wins fairly in 
a game or in what is usually called "fair” business competition. 

In recent years, competition has developed several new and in¬ 
teresting phases, such as the one-price system, inter-commodity, 
intra-industry, inter-industry, inter-territorial, and international- 
industrial competition. The newer forms of competition are 
prone to utilize high-pressure salesmanship, national advertis¬ 
ing, skillful appeals to the fears and hopes of great numbers of 
people, and much propaganda based upon a knowledge of 
human psychology. The basic conditions under which competi¬ 
tion takes place have so changed since the days of Adam Smith, 
of the American pioneer, and of small-scale and localized indus¬ 
try that the traditional forms of praise and of distrust no longer 
apply. We are living in a business world in which the typical 


82 


ECONOMICS 


forms of competition are very different from the ones we talk 
most about. 

The one-price system now used in nearly all retail stores has 
greatly changed the mechanism of bargaining. In the retail 
business individual bargaining through bluff and higgling is 
going out of fashion. Each and every customer is given the op¬ 
portunity to buy a certain article at a fixed price. The cus¬ 
tomer may take it at that price or not as he sees fit, but the price 
is not changed to make an additional sale. When the price 
is changed, it is modified for all comers. Frequently, in con¬ 
nection with the one-price system, the article sold is in the 
original package with the name of the maker placed in a con¬ 
spicuous place on the package. The original package defi¬ 
nitely fixes responsibility for quality and quantity. Many re¬ 
tailers also take back the article and give the purchaser his 
money if the goods are not satisfactory or as represented. These 
new methods of retail marketing modify greatly competitive 
conditions and improve business ethics. The old legal rule of 
“Let the buyer beware” helped to make cheating safe. The 
pedlar, the fair merchant, or the ship captain of the Middle 
Ages did not do a continuous or recurrent business to the extent 
that the merchant of today does. The merchant of early times 
has aptly been called “a peripatetic rogue who reduced prevari¬ 
cation to a system.” The one-price, original package, money- 
back plan of marketing makes for business honesty. 

Inter-commodity competition is found in the rivalry of enter¬ 
prises producing commodities which may be used for the same 
purpose. Lumber dealers compete with the dealers in brick 
and stone. One type of roofing competes with another. In the 
traditional sort of competition, lumber dealers competed with 
lumber dealers, and small storekeepers with small storekeepers. 
In inter-commodity competition, a group of producers or sellers 
of the commodity unite in an association or an “institute” with 
a view to keeping or improving the market for the product they 
are interested in. Those who, under the old forms of competi¬ 
tion, would vigorously fight one another now cooperate in a 
campaign against a powerful business foe threatening the entire 
industry. 


VALUE AND PRICE 


83 


In intra-industrial competition retailers may organize whole¬ 
sale houses and build factories, or wholesalers and manufac¬ 
turers may go into the retail business. This is vertical combi¬ 
nation. Sales campaigns by an associated group of producers 
and distributors to get a larger share of business constitute 
inter-industrial competition. The various ^‘week^^ campaigns, 
as “Eat-more-raisins Week,'' and the organized attempts to 
make Americans “shoe conscious," “silk conscious," and “con¬ 
scious" of many other products, are examples of this new 
type of planned competition. The struggle of one town or sec¬ 
tion against another in the matter of getting new industries, 
conventions, etc., is a case of inter-territorial competition. Flor¬ 
ida versus California is an example. 

The business fight between large oil corporations in different 
countries is an example of international-industrial competition. 
It was proposed in 1928 to pass a federal law facilitating the 
dumping of agricultural products abroad so as to prevent flood¬ 
ing the home market and reducing prices to a point which 
threatened to take away the farmer's opportunity to make 
profits. The actual carrying out of such a proposal would doubt¬ 
less result in international-industrial competition. 

Monopoly. When one producer or seller, or a group acting 
unitedly, can control all, or a considerable fraction, of the supply 
which is brought to the market, he can within certain limits 
determine the market price. The business is no longer competi¬ 
tive; it is a case of monopoly. There may also be a buyer's 
monopoly when sales can only be made by several would-be 
sellers to one buyer or to a group acting concertedly. The es¬ 
sential feature of monopoly is the ability to control the supply 
or the demand, and, consequently, to determine prices. A suc¬ 
cessful monopoly, from the point of view of the monopolist, is 
one in which the supply marketed and the prices charged will yield 
a larger return than under competitive conditions. The shrewd 
monopolist will attempt so to fix the price of the monopolized 
article as to give the greatest net profits—that is, profits per 
piece multiplied by the number sold. If prices are fixed too 
high, the number of sales will be greatly reduced and profits, 
while large on each unit, may be small in sum total. If prices 


84 


ECONOMICS 


are placed too low, profits per unit may practically disappear. 
The monopolist controlling the output of a necessity for which 
the demand is quite inelastic and for which no cheap substitutes 
are available, possesses the power to take a heavy toll from the 
consumers of the monopolized commodity. A commodity for 
which the demand is quite elastic does not readily lend itself 
to monopolistic profit-making. 

Many classifications of monopolies have been presented. For 
our purpose, it will suffice to recognize two classes: social and 
natural.^ Social monopolies may be divided into legal, such as 
patents and copyrights, and special privilege, such as those re¬ 
sulting from railway rebates or from public favoritism in the 
granting of contracts and the like. Natural monopolies may 
also be divided into two subclasses: (1) those arising from the 
control of a limited supply of raw material, as in the case of the 
anthracite coal mines of Pennsylvania, and (2) those arising 
from the peculiarities of organization. Businesses of high fixed 
expenses, such as railways and public utilities, are monopolies 
of organization. 

Unrestricted monopoly power in the hands of one company 
or of a small group of enterprisers gives power to levy toll upon 
the consumer. Fortunately, one or more of three important 
restrictions upon the power of monopolists are as a rule brought 
into play in such a manner as greatly to reduce monopolistic 
power. Monopoly may be interfered with (1) by the possibility 
of a satisfactory substitute being placed on the market if the 
price of the monopolized article is not kept below the point of 
maximum returns, (2) by the threat of potential competition 
if excessive profits are made, and (3) by the passage of regula¬ 
tory legislation determining rates, as in the case of railways and 
public utilities. Even in the absence of these salutary restric¬ 
tions monopoly does not necessarily mean extraordinary high 
prices; but it must not be forgotten that the essence of monop¬ 
olistic power is the ability to restrict the amount placed on 
the market. 

1 The classification adopted by Dr. Richard T. Ely. 


VALUE AND PRICE 


85 


Questions 

1. What is the difference between exchange value and price? 

2. Differentiate between normal and market price. 

3. Give examples of elastic demand. Of inelastic demand. 

4. Why does competition persist in the retail business of selhng 
groceries? 

5. Give several examples of older forms of competition. 

6. Give examples of new types of competition. 

7. Does the one-price system eliminate competition? 

8. Show how the monopolist attempts to fix the price of his product. 

9. What is meant by potential competition? 

References 

Edie, Lionel D., Economics: Principles and Problems, Ch. 9. 

Ely, R. T., et aL, Outlines of Economics, (5th ed.), Chs. 9-12. 
Fairchild, Fred R., Furniss, E. S., and Buck, H. S., Elementary 
Economics, Pt. 2. 

Hayes, H. G., Our Economic System, Pt. 4. 

Seager, Henry R., Principles of Economics, Chs. 12 and 13. 


CHAPTER IX 


MARKETING 

The Job of the Middleman. The marketing of products in¬ 
cludes all the processes involved in getting commodities from 
the business agents giving form utility—farmers, manufactur¬ 
ers, and other primary producers—into the hands of consumers. 
The job of the middleman is that of giving time and place utility 
to commodities; it is broadly speaking that of marketing. In 
primitive and pioneer days the producers and consumers were 
usually in the same group. Except in the case of a few commodi¬ 
ties, marketing and markets were unknown. Goods were not 
bought, sold, or priced. The middleman was not yet called 
into existence. The first middlemen were itinerant traders or 
pedlars who carried wares from place to place, receiving in 
exchange other goods. The intinerant trader or pedlar did 
much to enlarge the market area and to make possible the early 
steps in division of labor and specialization of duties. 

The middleman is a specialist; he is the connecting fink be¬ 
tween primary producers and ultimate consumers. In modern 
times the middleman performs a service which must be per¬ 
formed by some one. If this function is not taken over by 
specialized middlemen, it must be performed by the producer 
or by the consumer or divided between the two. The growth 
of cities, localization of industries, the development of speciali¬ 
zation and of the subdivision of labor, all tend to lengthen the 
distance in time and space between the producers of goods 
and the consumers. Obviously some one must act as the con¬ 
necting link between the two. Manufacturers and farmers 
specialize in producing goods; merchants—middlemen—special¬ 
ize in finding a market for these goods. Retail and wholesale 
merchants and the transporters and storers of goods are middle¬ 
men. Is not the task of getting goods to the place where they 
are needed and when they are desired as important and com¬ 
mendable as that of manufacturing or mining? 

86 


MARKETING 


87 


Where “time is moneythe specialized middleman flourishes. 
“Generally speaking/^ writes Professor Carver, “it will be 
observed in any community where the average person considers 
his time valuable, there are a great many middlemen inter¬ 
vening between producers and consumers and very little di¬ 
rect marketing. . . . The system of direct marketing saves 
money, it is true, but it wastes time; the system of indirect 
marketing saves time but, in a sense, wastes money.The city 
dweller who has work to do cannot afford to market directly; 
he cannot spare the time to search out the farmer and market 
gardener. He depends upon those who bring the products to 
him. 

Like other business men, the merchant of today is in busi¬ 
ness for profit. He may, when the opportunity is offered, de¬ 
mand and obtain a monopoly price for his services, but there 
is nothing unique about that practice. The profits of middle¬ 
men may be too large and the processes of marketing excessively 
wasteful, but the remedy is obviously not to be found in an 
attempt to eliminate middlemen or their functions. Only a 
return to a primitive economy with little or no marketing would 
enable us to get along without middlemen. A practical pro¬ 
gram calls for a reduction of unnecessary costs and wastes of 
marketing. 

In contrast to primitive, feudal, and pioneer days, demand is 
today a complex matter. The marketing process has become 
intricate. Many grades, kinds, and styles are necessary to cater 
to the peculiar wants of different classes of people living under 
different physical and social environments. The producers and 
sellers of goods must analyze the nature of demand. They can, 
it is true, by skillful advertising and salesmanship modify and 
shape in some degree the nature of demand, but beyond 
certain rather indefinite limits even high-pressure salesman¬ 
ship cannot go. However, in the marketing of commodities, 
“the exercise of critical judgment, of shrewd reasoning, of men¬ 
tal strategy takes place principally on the part of sellers.’^ In¬ 
dividual purchases for personal or family use are necessarily 
on a small scale and subject to the limitations of a small-scale 
industry; but the purchasers for railways, public utilities, manu- 


88 


ECONOMICS 


facturing plants, large institutions and hotels are likely to ex¬ 
hibit ‘‘shrewd reasoning” and “mental strategy.” Articles 
purchased by large concerns may be required to measure up 
to definite specifications in regard to quality. Possible changes 
in demand, in supply of raw materials, in price levels, and in 
the business cycle complicate the problem of the purchasing 
agent. 

Little uniformity is observed in marketing methods. Bridges 
and steam boilers are sold direct. Grain is often sold through 
jobbers or wholesalers. Clothing may be marketed directly by 
the manufacturer to retailers. House-to-house canvassers sell 
a variety of articles. Combination and integration in industry 
are tending to place under the control of one corporation the 
entire process of manufacturing and marketing. A large auto¬ 
mobile company may make the retailer an agent for the corpora¬ 
tion instead of an independent business concern. A shoe manu¬ 
facturer may establish his own retail stores or he may sell to 
independent dealers. Goods are sold only for cash, or on the in¬ 
stallment plan, or short-time credit may be allowed. The in¬ 
dependent middleman may be eliminated, but his functions 
must be performed by some individual or group of individuals. 

Marketing Functions. Marketing is not a unitary process. 
In addition to selling and transporting goods, several other serv¬ 
ices are performed in the field of marketing. The product must 
be assembled and, in the case of many commodities, shipped 
in large quantities. The retailer sells in small quantities; the 
assembled units are divided so that they may be sold by the 
unit or the dozen. Frequently goods must be packed for ship¬ 
ment or for temporary storage. Methods of payment, credit, 
collection, and insurance may be included as part of the machin¬ 
ery of marketing. The retail store or market place must be pre¬ 
pared to furnish products of the size, quality, color, and price 
that the customer desires. The salesroom should be neat and 
attractive, and the service prompt and courteous, in order to 
insure sales even though prices are low. 

Cost of Selling Goods. The cost of selling goods in small 
quantities is high. On the average nearly half of the consumer’s 
dollar is absorbed in the cost of selling and distributing com- 


MARKETING 


89 


modities. A considerable fraction of the cost of selling is spent 
in order to stimulate demand, in the form of advertising and 
salesmanship, and to satisfy the demand for convenience on 
the part of the consumer. A large fraction of the American 
people live in towns and cities in which rents and taxes are high, 
and the distance from the places where agricultural and mineral 
products are obtained, considerable. In cities, terminal facilities 
are expensive and local delivery costs are not low. There is a 
^‘high cost of convenience.’' The merchant finds that the typi¬ 
cal customer wants a thing ^‘when she wants it, how she wants 
it, and where she wants it.” The storekeeper must keep on hand 
sufficient stocks to meet any unusual demand. His overhead 
expenses are increased. The carton, sanitary precautions, de- 
hvery of purchases, the telephone, rest rooms, show windows— 
all add to the costs of selling and distribution. There are prob¬ 
ably too many retailers, many of whom use inefficient business 
methods, and also there is much unnecessary shipment of goods. 

Standardization or simplification in the varieties or types of 
goods would decrease both the manufacturing and the marketing 
costs of commodities. If the sizes and styles of doors in cheap 
and medium-priced houses were reduced to two or three stand¬ 
ardized types, the manufacturing methods could be further 
simplified, and the total stock of doors carried by the jobbing 
houses and retailers could be likewise reduced. Costs to the 
builders of houses would be lowered. The same conditions 
apply to many forms of clothing and to a great variety of manu¬ 
factured articles. Multiplicity of styles and individual idio- 
syncracies in demand increase manufacturing and marketing 
costs. The Model T Ford car was sold at a very low price be¬ 
cause it was very highly standardized. One Ford was exactly 
hke another. The more general use of cost accounting will also 
aid in improving the efficiency of retailers and help to reduce 
the cost of selling. 

The rise of chain stores and mail-order houses may reduce 
some of the expenses of retailing, but it seems clear that the 
cost of marketing will remain high as long as people are crowded 
into cities, and as long as emphasis is placed upon convenience 
and cleanliness in the distribution of products. Marketing is 


90 


ECONOMICS 


doubtless less scientific in its methods than manufacturing, but 
there is little reason for expecting large reductions in marketing 
costs in the near future. In recent years chain stores have multi¬ 
plied with great rapidity. Manufacturers have reached beyond 
the wholesalers and jobbers to establish stores enabling them 
to sell direct to the ultimate consumer. Chain stores have also 
purchased or built plants to manufacture articles which they 
are prepared to sell. Cooperative marketing, especially of farm 
products, has expanded rapidly. The new Federal Farm Board 
may be expected to stimulate further progress. The cooperative 
store, while successful in Europe, has not up to date scored well 
in this country. 

The old-time independent retailer has by no means been 
driven out by the chain and department stores. One authority 
on marketing presents the following estimate of retail sales in 
the United States: 



PER CENT 

VOLUME 

Department Stores 

16 

$6,400,000,000 

Chain Stores 

12 

4,800,000,000 

Mail-Order Houses 

4 

1,600,000,000 

House-to-House Canvassers 

2 

800,000,000 

Company and Cooperative Stores 

1 

400,000,000 

Independent Stores 

65 

26,000,000,000 

Total 

100 

$40,000,000,000 


In making sales for a wide variety of trade-marked original- 
package goods, the so-called independent is little more than an 
agent for the producers of a nationally advertised brand. The 
producer fixes the price, advertises the article, and is respon¬ 
sible for the quality. The independents are beginning to form 
associations for group buying and advertising in order to meet 
the competition of the chain store and to retain such vestiges of 
“independence’' as may be found to exist. 

Advertising and Salesmanship. The American people are 
spending, roughly estimated, one and one-half billions of dol¬ 
lars annually in advertising. Advertising is a form of propa¬ 
ganda. In the pay of advertising agencies are shrewd, practical 
psychologists. These experts have learned how to play effec- 



MARKETING 


91 


lively upon the hopes, fears, and prejudices of men and women 
so that they will respond with their spending money. It may be 
suggested that one of the reasons for extensive advertising and 
high-pressure salesmanship is the inefficiency of the typical 
purchaser. Again, much of the reduction in costs of produc¬ 
tion due to efficient engineering methods and mass production 
is counterbalanced by the added expense of advertising and 
salesmanship in selling the additional output. Much of the ex¬ 
penditure for advertising is waste. Its purpose is to induce the 
consumer to buy A’s brand of soap instead of B’s. Such adver¬ 
tising is purely competitive. In the words of another, “surely 
no good interest is served when a concern takes a double page 

in the-, and in two colors displays the picture of a plate of 

ham and eggs.’^ Large advertising houses calculate that of a 
million dollars spent in advertising by a big concern, on the av¬ 
erage, $850,000 to $900,000 is spent to keep the business which 
it has and only $100,000 to $150,000 to get new patronage.^ In 
recent years competitive advertising has entered a new field. 
Some of it is directed toward inter-industry instead of within- 
the-industry competition. The familiar illustration of a ciga¬ 
rette manufacturing concern advising young women to reach for 
their product instead of candy is an instance of the new align¬ 
ment of business rivalry. ^ This is super-competition. 

However, all advertising contains some elements of competi¬ 
tion. If, by advertising a new commodity, as was the automo¬ 
bile a few years ago or as the radio is today, men and women are 
induced to buy automobiles or radio sets, the sum total of other 
purchases must be reduced. The purchasers have a certain 
amount of purchasing power. If a portion of it is spent in an 
unusual way for a recently advertised commodity, less is left to 
buy other commodities. The old argument of the prohibition 
orator to the effect that the dollar spent for beer could not be 
used to buy bread applies in this discussion. 

Advertising shifts demand for one article to another, but it 
cannot change directly the sum total of the community’s de¬ 
mand or purchasing power. The only way in which advertising 

1 Professor H. J. Davenport. 

2 See Chapter on Valu^ and Price, 



92 


ECONOMICS 


may increase the total demand is indirectly. Advertising often 
stimulates new desires; indeed, that is the chief purpose of the 
large expenditures upon advertising. The appearance of new 
desires may lead to greater efficiency and initiative on the part 
of many persons. As a consequence, the total productivity and 
the sum total of purchasing power may be increased. Certain 
employers have used the stimulation of new wants to assist in 
keeping their employees at work regularly. A demand for bet¬ 
ter clothes or a Ford will lead employees who heretofore have 
been satisfied with the returns from four days’ labor to work 
regularly five or five and one-half days per week. 

Advertising may decrease other costs of marketing. After a 
particular brand of goods—for example, canned goods—has been 
well advertised and a large number of consumers have become 
very familiar with its merits, the time of the purchaser and the 
storekeeper is economized. The buyer asks for Blank’s goods. 
He knows what he wants; “shopping” and higgling are re¬ 
duced to a minimum. The importance of the goodwill attached 
to the extensively advertised trade-mark is the cause of the 
struggle going on between the chain stores and the manufac¬ 
turers in regard to the branding of products. The chain store 
is trying to force the use of its name, while the manufacturers 
are insistent that the brand name be one which discloses the 
producer. In early days the merchant prince dominated; later, 
the manufacturers won out. Now, a new fight is on. As a con¬ 
sequence the chain stores may reach out and control their own 
manufacturing plants, and the manufacturers may more and 
more control their own distributing outlets. It is a battle for 
“the loyalty of the consumer.” 

Newspaper and magazine advertising have been utilized to 
such an extent that the function of news dissemination and of 
educating or pleasing the readers has been subordinated to that 
of carrying advertising. The chief function of many popular 
journals is that of an advertising medium. Reading matter is 
skillfully sandwiched in between advertising in such a way as 
to attract attention to the latter. The news presented, the 
editorials, and the articles printed are colored so as to assist, 
or at least not to injure, the advertiser. Profits in the newspaper 


MARKETING 


93 


and magazine business are derived chiefly from the advertiser. 
Publishers and editors too often cater to the purchasers of ad¬ 
vertising space instead of to the readers of the publications. 
The radio is developing a new form of advertising in which music 
and other forms of entertainment are judiciously interspersed 
between skillfully worded encomiums upon the merits of the 
article produced by the company furnishing the program. The 
purchaser of a much-advertised product is compelled to pay 
for all sorts of magazines and radio broadcasts, good, bad, and 
indifferent, when he buys. 

Advertising has become a powerful factor in our daily life. 
The editor of a well-known weekly meditated upon the rise of 
the chewing gum business after the following fashion: “In the 
span of a generation we have seen advertising transform a 
childish impulse to masticate for mastication’s sake into a 
mighty hunger for thousands of tons of chicle.” Advertising 
and salesmanship are forms of the famous art of persuasion. 
Today advertising is often essential for successful merchandis¬ 
ing; but the formula for business success is twofold. “Have 
something to sell and tell people about it.” Too many adver¬ 
tisers are prone to stress the latter part of the formula and over¬ 
look the first clause. Political campaigns and reform movements 
are also examples of the use of persuasion. The right to use 
persuasion in a peaceful manner is a foundation stone of democ¬ 
racy. During the World War the advantages of thrift were 
given wide and effective publicity. We are beginning to use 
advertising to aid in the prevention of crime and of accidents. 
Greater use of the “arts of persuasion” is desirable in the form 
of advertising, publicity, and education to make people desire 
things which make for human betterment and for economic and 
social progress. 

Recent Changes in Marketing. The whirlwind increase in 
productivity, the improvement in transportation facilities, and 
more especially the development of mass production methods, 
which have been discussed in preceding chapters, have in turn 
paved the way for new methods of marketing goods. Shrewd 
observers tell us that we ride into the land of tomorrow over 
the roads and in the vehicles of yesterday and today. Tomor- 


94 


ECONOMICS 


row’s problems are being fashioned for us in the heat and tur¬ 
moil of today’s business operations, and today’s new problems 
emerge out of yesterday’s thrust ahead. 

In the long eras of scarcity which reach from the time man 
first appeared down to recent times, it was not necessary or de¬ 
sirable to stimulate demand. It was difficult to provide the 
necessities of life; extra mouths to feed or unusual consuming 
power constituted a menace to the community. The rapid 
multiplication of productive capacity has greatly changed the 
situation. Stimulation of wants and desires has finally attained 
a place of importance in the business world. Indeed, business 
has entered a free-for-all struggle to gain the good will or loyalty 
of the consumer. The development of days and weeks in which 
consumers are urged to buy some particular article, the use of 
various slogans, such as “Say it with flowers,” are indicative of 
the methods employed in order to multiply and intensify wants. 
High-pressure salesmanship, campaigns, contests, “pep” con¬ 
ventions in which are copied the college boy’s stuff are new 
ways of attracting the consumers’ dollars. 

Increased productivity has afforded a much greater oppor¬ 
tunity for the exercise of a considerable range of choice. This 
in turn has complicated the functions of merchandising. With 
the growth of cities and the appearance of apartment-house 
living, lack of space and proximity to stores have made hand- 
to-mouth buying the rule for increasing numbers of household¬ 
ers. Very few families now buy except for immediate needs. As 
a consequence, the retail stores must provide certain and punc¬ 
tual service. In considering the recent changes in marketing 
methods, four factors are worthy of special stress: mass pro 
duction, the rapid spread of information, obsolescence, and 
installment selling. 

Mass production rests upon two bases: (1) large demand for 
a standardized article, and (2) the continuity of demand. The 
ideal in mass production is regular demand for an increasing 
volume of sales continuing year after year, unaffected by sea¬ 
son, fashion, out-of-dateness, or individual idiosyncracies. All 
changes in demand, whether due to seasonal fluctuations, obso¬ 
lescence, or individuality in demand, are enemies of mass pro- 


MARKETING 


95 


duction. As has been suggested, the Ford factory while the old 
model was being produced represented the climax in mass, or 
standardized, production. Its pohcies were grounded on the 
assumption that lowering prices would increase purchasers, and 
that the resulting increased output could be produced at les¬ 
sened costs per unit. Sales pohcies were subordinated to pro¬ 
duction requirements. 

Like many other processes and institutions, mass production 
sooner or later develops opposing forces. It means lowered unit 
costs of production, higher wages, shorter working days, and 
larger total profits. But these results of mass production tend 
to place the consumer in a strategic buying position and make 
it possible for him to demand other than standardized articles. 
Simplification and standardization, the idols of mass production, 
run counter, as national income grows, to the newly cultivated 
demand for exclusive and varied types of goods. The decision 
of Henry Ford to change from the old and familiar standardized 
car to a new model catering in some degree to the mounting 
desire for style and speed scores the passing of the high-water 
mark in standardization in industry. 

Style has become a greater factor than economy in the sale 
of all but sheer necessity products.” ^ This statement may 
exaggerate the present situation, but it pictures a tendency 
which the last few years have thrown into clear relief. If the 
demand for an article begins to decline because of changes in 
fashion, it is now generally recognized that cutting prices con¬ 
stitutes a futile gesture. If short skirts for women are in vogue, 
long skirts cannot be sold by reducing prices. Ping-pong sets 
at reduced prices will not sell in an era when golf is supreme. 
A standardized, but obsolete, article is not marketable. Pro¬ 
ducers and merchandisers must go with the tide of the con¬ 
sumer’s demand or fall into the clutches of a receiver. By 
advertising they may be able to modify within narrow limits 
the course of the consumer’s demand, but there their power ends. 
Many a tug of war is being fought between the production ex¬ 
perts emphasizing the efficiency of standardization and simplifi¬ 
cation, and the sales department stressing the growing individu- 

1 Mazur, Paul M., American Prosperity, p. 127. 


96 


ECONOMICS 


ality of demand. The next step may lead us to an ^^age of 
merchandising” in which there will be a careful balancing of 
production and of purchasing schedules, an age in which neither 
the sales nor the production departments shall dominate at the 
expense of the other. 

Better facilities for travel and communication, and the advent 
of the movies and the radio are bringing almost simultaneously 
the same news, ideas, and fashions to the people of the entire 
country. A fashion or fad no longer begins in New York or 
some other Eastern city and spreads leisurely through the 
length and breadth of the nation. It is now accepted quickly 
all over the nation, and likewise it dies out at practically the 
same time in the city and in the rural hamlet. This modifica¬ 
tion in demand makes it exceedingly difficult for large producers 
of fashionable goods to meet the rapid alterations in demand 
without considerable loss in obsolete equipment and unsalable 
stock. 

Fashion, style, or obsolescence has been playing a more and 
more important role in recent years in causing the replacement 
before worn out of a great group of commodities. “Wear alone 
made replacement too slow for the needs of American industry. 
And so the high-priests of business elected a new god to take 
its place along with—or even before—the other household gods. 
Obsolescence was made supreme.” ^ In this way, the immi¬ 
nent danger of market saturation was removed. Automobiles, 
radios, clothing, furniture, lighting fixtures, watches, and spec¬ 
tacle frames are discarded as out of date long before these 
articles are worn out. The longevity of the style-life has suffered 
drastic reduction since 1922. Advertising and salesmanship 
have skillfully been directed in the automobile industry, and 
in others as well, toward putting the owner in a chronic state 
of dissatisfaction in regard to the style of his car. The self¬ 
starter rendered obsolete the car which must be cranked. The 
open car was displaced by the closed model; two-wheel brakes, 
by four; the high-pressure tire, by the balloon; dark colors were 
followed by the colors of the rainbow. Now, the front-wheel 
drive is being introduced. Standardization and obsolescence 

1 Mazur, Paul M., American Prosperity, pp. 92-93. 


MARKETING 


97 


move in opposite directions. The latter calls for a product that 
is not uniform year after year. Obsolescence makes large stocks 
of goods on hand a serious financial menace even in a time of 
stable price levels; it stimulates hand-to-mouth buying. The 
conflict is on between mass production and up-to-dateness or 
fashionable demand. 

Installment selling is not a recent development. Pianos, 
sewing machines, farm implements, and furniture have for 
many years been sold on this basis. Bond issues enable a com¬ 
munity to get improvements before making payment. Serial 
bond issues are clearly installment-payment schemes. In recent 
years installment selling has figured prominently in the mar¬ 
keting of automobiles, radio sets, refrigerators, washing ma¬ 
chines, and vacuum cleaners. While selling goods on the in¬ 
stallment basis has been a factor in lessening sales resistance 
and in stimulating demand, it has not played so important a 
role as obsolescence, skilKul advertising, and salesmanship.^ 

It may be suggested that the prevalence of purchasing on the 
installment plan is affecting the matter of ownership. Who 
really owns the car that is being paid for on the monthly- 
payment basis? By the time all payments are made the car is 
traded in for another, and the monthly payments monotonously 
continue. Where is the line to be drawn between ownership and 
paying rent for the use of a car or of a radio? 

Cooperation in Marketing. In the field of marketing, co¬ 
operation may assume at least three forms: the cooperative 
store, retailers’ cooperation, and distributors’ cooperation. The 
cooperative store differs fundamentally in aim from a store 
operated by a single enterpriser or by a corporation. In the 
ordinary store the profits go to the owners in proportion to their 
ownership rights. In a cooperative store the profits received, 
after paying running expenses and interest on the shares of 
stock, are distributed among the cooperating purchasers or 
members in proportion to the amount of their purchases. Each 
cooperator is required to own at least one share of stock. 
Upon the stock a definite and low rate of interest is paid, and 
each cooperator has one vote only. The ownership of more than 

1 Recent Economic Changes, Vol. I, p. 401. 


98 


ECONOMICS 


one share of stock does not increase voting power. The coopera¬ 
tive store has been much more successful in England and several 
other European countries than in the United States. In several 
American colleges, however, cooperative stores for students 
have been successfully operated. It was estimated in 1930 that 
the number of consumers' cooperative retail societies in the 
United States was about 1800. Four wholesale cooperative 
societies were reported.^ 

Certain retail establishments confronted by the competition 
of chain stores have cooperated in regard to purchases. A com¬ 
bination of retail units using the same purchasing organization 
is in position to buy on a large scale and to bargain advanta¬ 
geously with manufacturers and jobbers. Up to date the most 
notable form of cooperation in the United States is distributors'. 
The citrus fruit growers of California, for example, have organ¬ 
ized the California Fruit Growers' Exchange for cooperative 
marketing of their fruit. In 1928 the United States Department 
of Agriculture estimated that 2,700,000 farmers sold all or a 
part of their products through cooperative societies. Grain, 
dairy products, live stock, fruit, cotton, tobacco, onions, and 
many other products are sold through distributors' cooperation. 
It was estimated that the annual volume of business of these 
cooperative associations aggregated approximately $2,400,- 
000,000. 

Questions 

1. What are the chief advantages and disadvantages of installment 

selling? * 

2. How are dynamos, wheat, and electric fans marketed? 

3. Obsolescence and standardization are opposing forces. Explain. 

4. Can the middleman be eliminated? Can his functions be eliminated? 

References 

Clark, Fred E., Principles of Marketing. 

Mazur, Paul M., American Prosperity, Ch. 10. 

Recent Economic Changes, Vol. I, Ch. 5. 

Thompson, C. M., Principles and Practices of Economics, Ch. 14. 

1 Locomotive Engineers Journal, February 1920. 


CHAPTER X 


DIVISION OF THE PRODUCTS OF INDUSTRY 

Division of the Products of Production. Goods are produced 
for sale to satisfy the wants of consumers. The purchasing 
power of the latter is derived from their receipt of income in the 
form of wages, rent, interest, profits, or some combination of 
the four. Goods and services are exchanged for other goods 
and services. The sum total of the long-run demand of the com¬ 
munity is equal to the sum of the four forms of income—wages, 
rent, interest, profits. Or, disregarding temporary derange¬ 
ments because of foreign trade, the value of the output of the 
community is equal to the same total. In other words, in the 
long run the effective demand of the community tends to equal 
the supply of goods and services produced over and above an 
allowance for depreciation. The total output of the nation in 
goods and services priced in terms of the actual sale prices equals 
the money value of wages, rent, interest, and profits, which in 
turn equals the monetary income or the effective demand of 
the nation. The following equations picture the relation: 

Total production = depreciation+wages+rent+interest+profits. 

Wages + rent+interest+profits = total income = total production— 

depreciation (wear and tear, obsolescence, etc.). 

Temporarily, however, the total may not be the same. More 
may be produced for a time than is sold and the supplies or 
inventories of business houses may increase; or, for a time, more 
may be purchased than is produced and the supplies or inven¬ 
tories will be reduced. With our credit system it is possible to 
anticipate the future receipt of purchasing power and to pur¬ 
chase goods upon credit or the promise of future payment. 

If, in a nation or a community, the consumption of commod¬ 
ities and services equals the production less the depreciation, 
then there will be no additional accumulation of capital goods 
or there will be no savings. If, however, the consumption of 

99 


100 


ECONOMICS 


commodities and services is less than the production minus de¬ 
preciation, additional capital goods may be produced and the 
stocks of consumption goods increased. Under such conditions 
the capital equipment and the stocks of consumption goods 
are becoming larger; the nation is on the upgrade industrially. 
It is growing in wealth. Saving means the postponement of 
consumption and the production of capital rather than of con¬ 
sumption goods. The savings of a nation appear in more ma¬ 
chinery, in railways, in buildings, in durable consumption goods, 
such as pleasure automobiles, pianos, furniture, and dwelling 
houses. 

Saving—the increase in the capital goods, durable consump¬ 
tion goods, and the stores of transient consumption goods 
signifies (1) that the community is^ not utilizing all of its pur¬ 
chasing power for consumption goods, and (2) that it is utiliz¬ 
ing a portion for investment in capital goods and stocks of 
consumption goods. A nation that is saving is producing more 
than it consumes. Industries producing capital goods, such as 
the iron and steel industry, are stimulated. The people of a 
nation may not save or even keep up the depreciation of the 
nation’s capital. In such a case capital equipment will presently 
be reduced and efficiency lessened. During a great war such a 
condition may temporarily face the antagonistic countries. 
The total energy of the people is directed toward producing 
absolutely essential supplies for the prosecution of the war. 

In the long run the money value of imports from abroad tends 
to equal that of exports to other countries. Temporarily a na¬ 
tion may increase its savings or its consumption of commodities 
by borrowing from abroad. While borrowing, its imports tend 
to exceed its exports by the amount of its borrowings. Later, 
when it becomes necessary to pay interest upon the amount 
borrowed and to pay back the debts, exports tend to over¬ 
balance imports. International borrowings, debt and interest 
payments, and reparations involve the actual transfer of goods. 
Only very small fractions of large payments are or can be made 
in gold or in services. 

Production is a matter of joint effort. An enterpriser or mana¬ 
ger uses land, labor, and capital in the production of commodi- 


DIVISION OF THE PRODUCTS OF INDUSTRY 101 


ties which are to be marketed. Each plays an essential r61e in 
the productive process. Take one of the factors away and pro¬ 
duction ceases or is greatly reduced. The total product is due 
to teamwork, to combined effort and use. It is as impossible to 
determine beyond controversy the contribution of labor or of 
capital as it is to ascertain which of a number of automobile 
parts is the most essential. When all are in place, the car may 
be driven; when any one of several parts is missing, the car can¬ 
not be operated. No one part can be said to be the most impor¬ 
tant. We are inclined, however, to attribute the leading role 
to the most scarce or expensive article in the group. 

Scarce and necessary factors in production are able to de¬ 
mand and receive large returns. When land was plentiful— 
free—httle or no rent was paid for the use of the land. Now, 
since the best located land in a growing city is small in extent, 
land rents and land values have been pushed to very high lev¬ 
els. Certain types of workers whose abilities are unusual and 
the results of whose efforts are much desired may demand and 
obtain relatively high wage rates, but the individual whose tal¬ 
ents are similar to those of the multitude will receive a rela¬ 
tively low compensation. We are prone to attribute virtue and 
productivity to scarce factors in production. In order to ob¬ 
tain motive power for the automobile, gasoline and air must 
be properly mixed in the carburetor. However, the driver of 
the car attributes the motive power to the gasoline because it 
is costly to obtain. The air, being free, is not considered to be 
productive. If gasoline were a free good and air were sold for 
a price, we would give the credit for motive power to the air. The 
selling price or the investment value of any factor in production 
depends upon the capitalization of expected earnings after neces¬ 
sary expenses are deducted. A piece of capital or an acre of land 
is considered valuable because it can be made with proper man¬ 
agement to become or to continue income-bearing. The larger 
the income from a building and building site and the lower the 
normal rate of interest on such property, the greater the invest¬ 
ment value of the property. If a building and building site bring 
in steady income or a net return of $1,000 per year and normal 
interest rates for a safe investment of that nature are, say, 4 per 


102 


ECONOMICS 


cent, the theoretical value of the land and building is $25,000. 
It is $1,000 capitalized at 4 per cent; or, 4 per cent interest on 
$25,000 is $1,000. 

Rent and Interest. The business man uses his funds to obtain 
land or capital as needed. He does not draw a hard and fast 
hne of distinction between the two. A large corporation sells 
bonds and with the funds received from the sale of the securi¬ 
ties buys land, factory buildings, and equipment. These are 
used by the corporation in productive enterprise; interest on 
the bonds is paid out of the funds received from the sale of the 
commodities produced. While economists usually draw a sharp 
line of demarcation between land which is not a product of hu¬ 
man effort and capital which is, in our discussion of the busi¬ 
ness world as it exists today, this distinction may be given little 
consideration. ^ Business managers buy or rent capital and land; 
they pay such sums as the relative supply and demand and busi¬ 
ness conditions seem to warrant. 

The term interest is used in the business world to signify 
payments made to obtain loanable funds, purchasing power, 
which may be used by the enterpriser or the management to 
obtain land, buildings, equipment, or working capital. In¬ 
terest is always considered as a percentage—6 or 7 per cent, 
for example—of the amount borrowed. In business terminol¬ 
ogy rent signifies a payment for the use of some particular 
piece of equipment, a building, or a certain strip of land that is 
hired for a period of time; it is expected that at the end of the 
period the equipment, the building, or the land will be returned 
intact to the owner. Rent is calculated in terms of money or 
sometimes in commodities; it is rarely or never expressed in 
percentages. 

Economists usually explain rent as a payment made for the 
advantages of a particular piece of land over no-rent or marginal 
land, but it seems clear that the services of land are bought 
and sold much the same as those of capital in the form of build¬ 
ings or equipment. The business man uses his funds to buy or 
rent land when needed exactly as he would do in the case of 

1 The writer draws this distinction in his high-school text, Elementary 
Economics. 


DIVISION OF THE PRODUCTS OF INDUSTRY 103 


capital. Land furnishes space or a location upon which busi¬ 
ness and other human activities may be carried on. The slogan 
Under all, the land'' expresses the basic importance of land as 
a foundation. Capital may technically be defined as the prod¬ 
uct of past effort used for further production. The typical ex¬ 
ample of capital is a machine, a tool, or a factory building. 
Land is not a product of past effort, although it is used in pro¬ 
ductive endeavor. 

Diminishing Returns. When the function of land is reduced 
to that of furnishing space upon which to carry on human 
activities, or as providing market opportunities, its desirability 
or its value in the business world depends upon scarcity and 
location. A well-located strip of land in the midst of a large 
city, because of the scarcity of similar pieces of land, offers 
certain strategic advantages to the owner or user. To obtain 
the right to utilize this land, a yearly rental will be paid to the 
fortunate owner. This is called, by the economist, rent. Land, 
like other economic goods, is valuable because and when it 
brings an income in money, goods, or satisfactions to its owner. 
Land which is not now rent-bearing, and which has no prospect 
of becoming rent-bearing, is valueless. 

The scarcity of good land is due to the limited land area of the 
earth and to the existence of a phenomenon commonly called 
“the law of diminishing returns." On a very valuable piece of 
land will ordinarily be built a high building. In the manu¬ 
facturing industry a plant built in the suburbs where land is 
comparatively cheap will be one-story; it will spread over con¬ 
siderable ground. In a large city the plant will be several stories 
high; land will be more intensively utilized. Market gardening 
represents a more intensive cultivation of land than wheat farm¬ 
ing and is attempted on land much more expensive than would 
be profitable for use in wheat farming. In all cases, however, a 
situation is sooner or later reached in which further utilization 
of capital and labor upon a given area of land tends to reduce 
the average output per composite unit of labor and capital 
applied to or utilized upon the given area. After that point is 
reached, diminishing productivity per unit is in evidence. It 
may be profitable, nevertheless, to continue appl 3 dng labor and 


104 


ECONOMICS 


capital to the area of ground under consideration after the 
point of maximum return is reached. Theoretically it would 
be profitable to do so up to the point at which the returns from 
the additional labor and capital are equal to the cost of using 
the extra units of labor and capital. In actual practice the exact 
point cannot be ascertained with any reasonable degree of ac¬ 
curacy. If there were no law of diminishing returns, theoretically 
all the wheat needed in the world could be produced on a small 
area intensively cultivated. One enormously high office building 
would answer for the great city of New York. But the law of 
diminishing returns has as universal application as the law of 
gravitation. New technical methods may, however, change the 
point at which diminishing returns appear. 

Capital and Interest. The economist defines interest as a pay¬ 
ment made for the use of capital—machinery, tools, buildings, 
etc. When an individual or a corporation borrows money, it is 
ordinarily used to purchase equipment or to build buildings. 
Therefore, what is really borrowed is capital. It may also be 
pointed out that the typical sort of present-day saving is actu¬ 
ally spending for capital goods rather than for consumption 
goods. The purchasing power you leave in a savings bank is 
loaned to businesses and used to buy equipment, buildings, 
and supplies. These are utilized by the management along with 
labor and land. The skillful use of capital, such as power-driven 
machinery, greatly adds to the productivity of industry. The 
management can pay interest for the use of capital out of the 
increased productivity resulting from its utilization. Manage¬ 
ment is obliged to pay interest for the opportunity to utilize 
capital because capital is scarce. It is the result of saving, of 
reducing the amount of consumable goods produced and con¬ 
sumed in a given period, and increasing the amount of capital 
goods produced. Temporarily men and women must curtail 
consumption in the hopes of increased returns in the future. 
When the people of a nation save, industries producing capital 
goods are stimulated. The saving appears presently in an in¬ 
crease in the number of buildings, more transportation facilities, 
more machinery, and the like. As a direct consequence of sav¬ 
ings and the skillful use of the results of saving, the productive 


DIVISION OF THE PRODUCTS OF INDUSTRY 105 


units of the nation increase the total national output which is 
also the national income. 

Profits. The business man operates a business enterprise 
with the expectancy of gaining profits, of making money. On 
occasion this leads to the making of goods in increasing amounts, 
and, at other times, to the reduction of output in order to avoid 
spoiling the market.” Profits may be considered as fees which 
society pays for the services of business men. Too much may 
be paid for such services. Profits fiuctuate greatly between dif¬ 
ferent industries and between establishments within the same 
field of industrial endeavor. Too frequently profits have little 
relation to endeavor or service to consumers. Profits equal 
gross income less necessary expenses for raw materials, depreci¬ 
ation, wages (including wages of management, or what the 
manager could earn if employed by another concern in a similar 
capacity), interest, rent, insurance, and taxes. A monopoly 
profit may typically be made by restricting output and limiting 
the supply of an article placed on the market. Roughly speaking, 
profits may be broken up into two classes: pure, or competitive, 
and monopoly. The profits emerging from monopoly have been 
sufficiently analyzed in a preceding chapter. ^ When competi¬ 
tion is active and little progress in invention and in the adoption 
of new methods is being made, pure profits tend to decline 
toward a minimum. This type of profits grows out of chance, 
invention, discovery, research, progress. Pure profits emerge 
as the result of inventions, of improvement in methods of man¬ 
aging and doing work, of price changes, of sudden changes in 
demand due to fashion, fad, or fancy, or of any other factor 
which causes rapid changes in either the demand for or the 
supply of a product. 

The manager of a competitive industry may temporarily 
make extraordinary gains, pure profits, by using new methods 
or machines. After his competitors adopt the same methods, 
competition with increased output tends to pull down the price 
of the product to a lower level and the extraordinary income is 
lost to the enterpriser. Profits of this kind can only be con¬ 
tinued by keeping constantly ahead of competitors. Sudden 

^ Value and Price. 


106 


ECONOMICS 


increases in demand for, or decreases in the supply of, a particu¬ 
lar article may enable certain fortunate producers temporarily 
to make extra profits. Losses may be incurred by a sudden de¬ 
crease in demand or increase in supply. There are many vicis¬ 
situdes in the business world which often result in large profits 
or losses. Pure profits may be looked upon as payments for 
risk-taking. As the engineer and scientific methods become 
more and more influential in the councils of industry, excessive 
fluctuations in the business world may be expected to diminish. 
Insurance against certain business risks shifts them from indi¬ 
viduals and firms to insurance companies, and at the same time 
transforms the nature of the risk. The cooperative carrying of 
risks changed what was for one concern a highly speculative 
form of risk-carrying into a calculable amount of losses for a 
large group of business organizations. The business man who 
refuses to take out fire insurance on his building, equipment, and 
stock is taking a gambler’s chance; the business man who in¬ 
sures against fire losses pays a definite premium or loss each 
and every year. In case his property is injured, however, he 
receives compensation from the funds of the insurance com¬ 
pany. The insurance company is not gambling. It cannot tell 
which particular building will bum; but it is practically certain 
that of one million insured properties, a certain percentage will 
on the average suffer fire losses each year. Speculation on the 
produce market and in other fields tends to stabilize prices. 
Speculators are professional risk-takers. The business man 
because of organized speculation may pass some business risks 
along to the professional speculators. For this service speculators 
as a class gain in the long mn more than they lose. They derive 
profits.^ 

Opportunity Return. A return or income over and above the 
amount necessary to evoke efficient productivity on the part 
of an agent in production constitutes a toll which the receiver 
of the return is able to levy upon the consumers of the products 
concerned; it is an uneconomic return or forced gain. In specific 
cases each one of the four fractions into which the national 
income is divided—rent, interest, wages, and profits—may con- 

1 See Chapter on Risk-Taking. 


DIVISION OF THE PRODUCTS OF INDUSTRY 107 


tain certain elements which are uneconomic; such incomes may 
properly be called “opportunity returns’’ or “rents.” The 
ability to levy such a toll or rent indicates that the toll receiver 
in some way is able to capitalize the element of scarcity in 
connection with the factor in production over which he exercises 
a measure of control. Land rent is largely opportunity return; 
profits, especially monopoly profits, usually include opportunity 
returns. The monopolist, the singer with an unusually pleasing 
voice, the owner of a rare and much-desired article that cannot 
be reproduced, the owner of a building in a time of rising prices 
or of limited construction projects, the individual or firm making 
unusual gains because of unexpected price changes, the owner 
of land or of a public utility franchise are, or may be, oppor¬ 
tunity-toll takers. Such uneconomic returns may be taxed at a 
high rate without impairing economic efficiency and without 
the probability of shifting»the tax to the shoulders of others. 

Questions 

1. In reality saving is a form of spending. Explain. 

2. What is capital? 

3. How is capital produced? 

4. Give examples of the receipt of pure profits. 

5. Distinguish between land and capital. 

Refekences 

Bye, R. T., and Hewett, W., Applied Economics, Part V. 

Curtis, Roy E., Economics: Principles and Interpretation, Chs. 29-31. 
Edie, Lionel D., Economics: Principles and Problems, Chs. 12-17. 

Ely, R. T., et at.. Outlines of Economics, (5th ed.), Chs. 22-24. 
Fetter, F. A., Economic Principles^ Parts H-IV, 


CHAPTER XI 


WAGES 

The Sale of Labor Power. Wages are paid for the services of 
labor. The wages of the unskilled laborer, the salary of the 
teacher or of the manager of an industrial plant, and the fees of 
the lawyer or the physician are all in reality wages. The money 
income of the great mass of people is received chiefly in the 
form of wages, and a large fraction of the total output of the 
community is purchased with money taken out of the pay 
envelop. Wages vary from the low wage of a few cents per hour 
paid the exploited sweat-shop laborer for irregular work to the 
yearly salary of a railway president or of the “boss’’ in the 
movie world. Wages range from the wage paid the migratory 
worker to the large fees received by the corporation lawyer with 
political influence. Wages also differ in different parts of the 
world or within the same nation. Real wages are higher in the 
United States than in England or China. Money wages are 
usually higher in cities than in the rural districts. 

A nominal or money wage is the amount of wage received per 
piece, per day, per week, or per year in terms of money. A real 
wage is the total of commodities and services which can be 
purchased with the money contained in the pay envelop. In a 
broader and more accurate sense the actual wage received also 
includes those services which the community or the employing 
corporation furnishes free of charge or below cost, such as edu¬ 
cational and recreational facilities. The real wage of a worker 
depends upon two variables: the money wage and the price 
level of commodities and services. In the actual wage received 
a third variable enters—the amount of the services provided 
through community action. Increases in money wages may be 
rendered of no avail to the worker by a rise in the price level. 
Indeed, many increases in money wages are the consequences 
of a higher price level that endangers the standard of flving of 

108 


WAGES 


109 


the worker and his family. Regularity of work is of greater 
significance in determining real wages than the money wage per 
hour or per day, since a high day wage may be accompanied by 
much loss of working time per year. Living expenses must be 
paid fifty-two weeks a year. It is the yearly wage that counts. 
The building trades and soft-coal mining are notorious for ir¬ 
regularity of work. 

Organized labor strenuously asserts that labor is not a com¬ 
modity. The Congress of the United States has solemnly spread 
such a statement upon our federal statute books. Certainly 
labor power is marketed in a manner similar to that of perish¬ 
able commodities. Today’s labor must be sold today; tomorrow 
it has passed out of existence. In one respect the sale of labor 
power involves consequences very different from those connected 
with the sale of commodities such as sugar and cloth. After 
sugar has been produced and is sold, the seller is not concerned 
with its destination or subsequent use. Whether it is utilized 
in this place or elsewhere, in this or that fashion, does not affect 
the life or comfort of the producer. But when a worker sells his 
labor power, he must go with his labor. The condition of the 
workshop and the length of the working day are matters of 
great import to the worker; the location of the workplace also 
determines, within somewhat elastic limits, the location of his 
home and the type of home surroundings. We cannot divest 
ourselves of our labor power as we would an overcoat and turn 
it over for so many hours a day to the employer. We literally 
sell ourselves temporarily when we sell our labor power. This 
peculiarity in the sale of labor power offers what may well be 
considered an adequate basis for insisting that labor is not a 
commodity. 

Explanation of Wage Rates. The wage theories advanced by 
economists have almost without exception rested upon a con¬ 
cept of a natural law of wages which it was understood operated 
in a mysterious, but definite, fashion. Only in recent years has 
the idea that wage rates are subject to control by social means 
risen above our mental horizon. If wage rates be subject, within 
limits at least, to control by human beings, what are the prin¬ 
ciples which may be used in determining what is a fair wage? 


no 


ECONOMICS 


Why should each worker receive what is actually paid to him 
as a wage? Why not more or less? Why should one human being 
be paid for services a hundredfold more than another? Why do 
hodcarriers often receive a larger wage than school-teachers? 
Why does Babe Ruth get a higher wage than a preacher or a 
factory foreman? Are there marked contrasts in wage rates 
due to differences in the supply of various grades and kinds of 
workers, to differences in productivity, to differences in needs 
or standards of living? Do workers receive as wages what they 
earn? Is the amount actually paid by an employer to a specific 
worker what the latter earns? What does a worker earn? What 
yardsticks may be used in determining what a man earns? Are 
actual wages ‘‘fair’’ wages? 

Should wages be paid in proportion to output (or efficiency) 
or effort? If so, how may output or effort be measured? Should 
wages be paid according to needs? If so, what needs—individual 
or family? And what are needs? Or, should the wages paid be 
equal for all workers as was the rate of pay for those who labored 
in the vineyard of Biblical fame? Should wages rise with in¬ 
crease in national productivity? If so, proportionally, progres¬ 
sively, or regressively? What are the chief sources out of which 
higher wages may be paid? What relation should wages bear 
to profits, interest, and rent? Is it for the welfare of the nation 
that wages be raised? Will increasingly adequate wages lead to 
industrial peace and efficiency? Will such wages insure greater 
regularity of work? To what degree do increases in wages de¬ 
pend upon improvement in consumption? What is the “right” 
wage rate to give maximum motivation to workers? What are 
the legitimate or fair claims of capital invested in an industry? 
What is the “right” or most effective rate of profits or of divi¬ 
dends? No one of the many theories advanced by economists 
is adequate to answer all of these questions; and, with the ex¬ 
ception of the bargain theory, none of these theories has gone 
far toward telling us why John Smith receives $4.00 for a ten- 
hour day, and James Adams, $25,000 per year for an indefinite 
working day. However, it is probably true that certain students 
of wage theories were more interested in determining what 
should be paid than in what actually is paid. But the difficulties 


WAGES 


111 


in determining satisfactorily what is a ^^fair wage’^ are even 
more baffling than those connected with the determination of the 
reasons for differences in the wage rates which are actually paid. 

Let us briefly consider certain wage theories. 

1. The Productivity Theory. It is urged that wages should be 
paid in proportion to output, productivity, or efflciency. The 
notion that the wages and the output of the worker ought to 
have a very direct relation is quite generally accepted. This 
theory rests upon the assumption that a worker will do his best 
only when he is being paid in proportion to output. John A. 
Hobson, the well-known English economist, declares that ‘Tt 
represents the greatest triumph of the business point of view 
over humanity.” It is clearly not in accord with the Biblical 
account of the vineyard and the eleventh-hour worker. But, 
whether we agree or disagree with this theory as the basis for 
wages which should be paid, let us ask can wages be paid in 
accordance with the yardstick of productivity? 

It is clear that two or more wage earners working by the piece 
and doing the same kind of work may be paid in proportion 
to their relative productivity. However, in modern complex 
industry all workers do not perform the same tasks. All the 
workers in a factory—managers, foremen, draftsmen, cost 
accountants, machinists, molders, common laborers, floor 
sweepers, night watchmen, and shipping clerks—help to pro¬ 
duce the flnished article. What does the man who screws on 
nut number 33 produce? How much is the output of the drafts¬ 
man? How does it compare with that of the pattern maker or 
of the stationary engineer of the plant? Who knows? How can 
it be measured? 

The difficulty of ascertaining the relative productivity of 
workers of different grades and activities in one plant is great, 
but that of comparing the output of all sorts of workers in the 
network of industries in the business world is far greater. Who, 
for example, is the most important factor in getting a food prod¬ 
uct into the hands of the ultimate consumer—grower, packer, 
middleman, railway- worker, deliveryman, grocer, advertiser? 
What'portion of the flnal or total product is produced by each? 
All may be necessary. Cut out one or two in the chain between 


112 


ECONOMICS 


the distant rural district and the great city, and the product 
does not reach the consumer. Also, a glut with accompanying 
waste occurs somewhere along the line. At present we tend to 
reward the scarce factors most liberally. A doctor, preacher, 
teacher, or scientist is not rewarded financially by society in 
proportion to the rewards received by the business man. Is the 
business man’s contribution greater than that of the doctor, 
preacher, teacher, or scientist? 

Furthermore, we are justified in inquiring: How much of the 
work of getting a product to the consumer is due to the skill 
and efficiency of a particular worker? How much to fellow 
workers? How much to managerial skill? How much to the 
state of the arts? Again, how much of a man’s own qualifica¬ 
tions are due to social conditions over which he has little or no 
control? A skilled and efficient worker located in an industrially 
backward country would find little demand for his services, 
could produce little in terms of price, and would, of necessity, 
receive low wages. With the retrogression so notable in certain 
portions of Europe after the Great War, the classes of people 
especially hard hit were professional men and experts of differ¬ 
ent types. Little or no demand for their contributions or serv¬ 
ices exists and their wages have been reduced practically to 
the vanishing point. This unfortunate situation is due directly 
to a reversion to a somewhat primitive social and economic 
status. 

Again, what is the productivity of Charlie Chaplin or of 
Jack Dempsey? Of a great painter, just before or soon after he 
achieves fame? What is the productivity of the poet or of a 
United States senator? Obviously, the theory that wages can 
be paid in proportion to productivity is impossible of practical 
application. As a rule, however, the advocates of the produc¬ 
tivity theory have attempted to apply it only to artizans, not 
to artists, professional workers, experts, or administrators. 

2. The Cost-of-Living Theory. According to this theory the 
wages paid should be equal to the expense of living of the 
workers, or wages should be paid in proportion to needs of 
different workers. A revised version of the theory is that wages 
should correspond to standards of living, or that a “comfort 


WAGES 


113 


wage^^ should be allowed. The comer stone of this wage theory 
is that each industry should pay at least for the maintenance of 
its personnel. It is the theory of depreciation and renewal 
applied to the human elements in industry. If this theory be 
accepted, an entirely different set of obstacles loom ahead. How 
are needs to be measured? Are needs to be interpreted as ab¬ 
solutely essential requirements? If so, then the wage rate prac¬ 
tically becomes the one famous in the subsistence theory of the 
socialists. If a more generous allowance is accepted as the proper 
definition of needs, a new list of difficulties appears. Does a 
high standard of living tend to increase productivity? (What, 
indeed, is a high standard of living?) If not, will enough be pro¬ 
duced in all cases to allow payment of wages in proportion to 
needs? A land area possessing only scanty natural resources 
and no extraordinary market opportunities will soon reach the 
point of diminishing productivity per worker as the population 
grows. There seem to be slight grounds for asserting that 
a high standard of living necessarily increases productivity 
measured in output. Finally, why not apply the standard-of- 
living or needs theory to managers and investors as well as to 
workers? 

It is doubtless possible to ascertain the cost of living of in¬ 
dividuals and families, including or excluding an allowance for 
the depreciation of the worker and for the training of his chil¬ 
dren. It would also be possible theoretically to pay wages 
equal to the ascertained cost of living, providing productivity 
were not insufficient. If, however, the cost of living finally 
agreed upon be that of a family of five, it would be a liberal 
amount for the worker without dependents. If, on the other 
hand, it be the cost of living of a single individual, a family of 
five would suffer unless its income were supplemented by the 
wages of the wife or children or both. If a worker with a de¬ 
pendent were paid a higher wage rate for the same amount and 
grade of work than one without dependents, the employers 
would employ the latter to the exclusion as far as possible of 
the former. This obstacle might be overcome, as in France, 
by paying to the worker with dependents a bonus out of a com¬ 
mon fund maintained by a group of employers. Cost-of-living 


114 


ECONOMICS 


wages would vary with changes in the price level, with the size 
of family, with the locality, with changes in the accepted con¬ 
cept of what should be included in the budget of a family. 
Should a living wage be considered on the basis of a day, a year, 
or a lifetime? Should a living wage be the same next year that 
it is today, changes in the price level taken into consideration? 

The amount of the living or the comfort wage has no direct 
connection with the productivity of the worker to whom the 
wages are paid or to the total productivity of the community. 
Could a comfort or a living wage be paid in densely populated 
and industrially belated India? Doubtful. A land area possess¬ 
ing only scanty natural resources and no extraordinary market 
opportunities will soon reach the point of diminishing produc¬ 
tivity as the population increases. The per capita production 
will be small. Enthusiasts for cost-of-living or comfort wages 
or for steadily increasing wages often overlook the popula¬ 
tion question and its connection with diminishing productivity. 
Another variation of the cost-of-living theory is the subsistence 
wage theory. According to this pessimistic view, the wages of 
the great mass of workers automatically and inevitably tend 
toward that required for a bare subsistence, presumably for the 
worker and his family. If wages are above this dreary level, 
increase in population will result and wages will fall to, or tem¬ 
porarily below, the minimum. This is a theory of exploitation. 
The subsistence-wage theorists emphasize the significance of 
the relation between population and productivity. 

3. The Equality Theory. All wages should be equal in amount. 
This theory appeals to the spokesmen of the poorly paid, the 
underdogs, or the unblessed. It is very simple. Conceivably it 
might be put into practice, but, if actually used, appeal would 
have to be made to other incentives than those connected with 
monetary rewards. It seems probable that the productivity of 
the nation would suffer greatly if equality of wages were achieved. 
Nevertheless, Tannenbaum urges that “incentive is not a special 
thing which must have money or inequality to operate.” It is 
true that much of the best work of the world has been done 
under the inspiration of other incentives than monetary reward. 
A man likes to do things that the group to which he belongs 


WAGES 115 

approves. This is quite clear in college athletics. Motives 
Other than monetary reward also play important parts in many 
activities outside the business world, such as, for example, 
politics, art, literature, and humanitarian movements. 

4. The Bargain Theory of Wages. The wage actually paid to 
a particular worker is the result of an agreement between an 
employer and an employee. The supply of particular kinds of 
labor and the demand for the same, the skill, knowledge, and 
necessities of both parties, are factors in fixing the wage exactly 
as in the case of any commodity. Certain kinds of skill that 
are somewhat rare and for which there is considerable demand 
and for which substitutes are difficult are in a favorable bar¬ 
gaining position and the fortunate possessors of such skill ob¬ 
tain high wages. On the other hand, certain workers who can 
do only the simplest forms of work are in a poor bargaining 
position. Almost any worker can perform the tasks that he 
is fitted to take up. Scarce factors in production, whether 
types of workers or special kinds of land or capital, are in a good 
position to bargain. Such factors are valued highly. In the 
words of Professor Leacock, a man “gets what he is worth, 
and he is worth what he gets.” 

There is clearly an upper limit beyond which wages cannot 
go. The total amount paid in wages by a given concern may not 
reach the total gross income received from the sale of its out¬ 
put. Neither can the payments to workers for any consider¬ 
able period of time fall below a subsistence wage. Between 
these somewhat elastic and indefinite limits actual wage rates 
are fixed by bargaining. This theory is not presented as con¬ 
forming to ethical requirements; it is a rule which tells us much 
about the reason for specific wage rates. 

Individual and Collective Bargaining. Individual bargaining 
takes place when an employer bargains with one worker. When 
the employer is the representative of a large corporation such 
bargaining also is usually called individual. In reality individual 
bargaining in its true form only occurs when a single enterpriser 
hires a worker. In the case of a corporation the emplo5dng 
agent acts for many stockholders; he is the representative of 
a group. Such bargaining is pseudo-individual. It is neither in- 


116 


ECONOMICS 


dividual nor is it collective bargaining. In collective bargaining a 
representative of a group of employers, union, or shop committee 
bargain with the representative of the owners of the business. 
While many collective and many individual bargains may be 
consummated in such a manner as to give material advantages 
to one party, such bargains are more Hkely to be reasonably 
well balanced than pseudo-individual bargains. In the latter 
case, the dice are loaded. The individual worker is placed in a 
disadvantageous position for bargaining. His necessities are 
great; a job means a source of income for his family. He is often 
ignorant of market conditions and opportunities and his labor 
is highly perishable. The representative of the employing con¬ 
cern occupies an enviable position as a bargainer. He usually 
is well informed as to conditions in the labor market. If he does 
not hire this particular worker, he may be able to get another 
soon; in any case, profits will be reduced very little. 

How May Wages Be Raised? It may confidently be asserted 
that the old-fashioned tactics of trade unionism of the ortho¬ 
dox type have passed the high-water mark. The fascinating 
process of screwing up wages and cfipping off hours has about 
gone to the limit under present conditions. The poficy of de¬ 
manding higher and still higher wages with little or no regard 
for the source whence the wages-fund flows will no longer stand 
the test. If labor is to get greater returns, labor and manage¬ 
ment must accomplish more. The problem of incentives is now 
more vital than ever before in the history of industrial enter¬ 
prise. Both the owner of the capital invested in the business 
and the worker who invests himself have lost the immediate 
and direct interest in the business which was such a notable 
and significant characteristic of small-scale industry. How can 
the clock-watching, inert, listless, output-restricting, discon¬ 
tented worker be transformed into an interested, alert, push¬ 
ing, and efficient achiever? And, how can the managerial staff 
of a corporation be given the professional spirit that will lead 
them to be interested in quality and quantity production rather 
than in more profits irrespective of service to the community? 
These are two of the most searching problems of modern in¬ 
dustry today. 


WAGES 


117 


Labor may be expected to push for increased output when it 
feels reasonably certain that it will receive an adequate share 
in the increase. Managers and investors, are actuated by similar 
motives. The morale of the working force can be improved 
only with difficulty or not at all if workers do not share in the 
benefits of such improvements. Unfortunately the intricacy of 
modern industry easily conceals cause and effect. It is not clear 
why John Smith received on Saturday night a certain number 
of dollars and cents in his pay envelop. Why are large dividends 
paid to absentee stockholders? Do unsympathetic and greedy 
individuals determine the actual rates of wages and dividends 
paid? The public school, the press, the movie, the radio, and 
the union are developing a type of workers who are critical as 
well as suspicious and who must be convinced. Labor in the good 
old days was more ignorant than today, and the excesses of lux¬ 
ury were not so visible as the automobile and modern advertising 
have caused them to be in the fourth decade of the twentieth 
century. The sheer weight of loud assertion, custom, authority, 
or prestige will no longer be sufficient. With the ballot box and 
organization the worker expects to gain a voice in the manage¬ 
ment of industry and in the determination of the wage rate. 

Accepting the bargain theory of wages as conforming closely 
to the conditions of actual business life, we are next concerned 
with the question: How may wages be increased? Are there 
sources from which higher wages may be derived? The problem 
of wage payment rests fundamentally upon two basic factors: 
(1) how much is produced to be divided among the factors of 
production, and (2) how large a fraction of this total may be 
claimed by the wage workers? If considered in terms of money 
value, both employers and employees are interested in increasing 
(1), but their interests are divergent in regard to (2). However, 
the amount produced to be divided may in no small measure 
depend upon coming to some amicable agreement as to (2). 
This important point is usually neglected in discussions about 
wage determinations and industrial peace. Dissatisfaction, 
ill will, and suspicion have much to do with the rising tide of 
restriction of output and sabotage that is receiving much ad¬ 
verse criticism and little constructive consideration. 


118 


ECONOMICS 


The question may be restated in another fashion. The pos¬ 
sibilities of increasing real wages lie (1) in taking a larger share 
of the total product from other factors in production—from 
rents, interest, and monopoly and competitive profits, or (2) in 
increasing productivity per capita without undue increase in 
overhead expenses in the form of land rent, monopoly returns, 
unnecessary services, and the like. If, however, rent and mo¬ 
nopoly returns continue to increase rapidly, it may be feasible to 
gather an increasing portion of them into the public treasury, 
and, thereby, allow a reduction in other forms of taxation. 
Monopoly and differential gains (rent) are in essence national 
overhead expenses. 

(3) Elimination of wastes of various sorts would develop a 
fund out of which higher wages might be paid—war, armaments, 
luxuries, harmful and adulterated products, various forms of 
illth are kinds of avoidable waste. Unwise expenditures by 
workers themselves—patent medicines, drugs, booze, etc.—tend 
to lower the actual income of workers in money and in com¬ 
modities and services which make for well-being. Higher real 
wages may also be obtained by reducing costs in the production 
and marketing of commodities as a consequence of more intelli¬ 
gent and scientific purchasing of supplies for the household, and 
as the result of improvements in the art of housekeeping. The 
wage problem is in part a problem of direction of consumption, 
of the education of the purchaser. ^ 

An excellent, brief statement of the influences which deter¬ 
mine wage rates is found in John Calder’s Capital’s Duty to the 
Wage-Earner. Calder’s view harmonizes with the bargain theory 
as outlined above. “ (1) The volume of the flow of wealth in the 
country—we cannot divide more than the National Income— 
nor can restricted diligence on the part of the laborer or reduced 
enterprise on the part of capital or management do other than 
cut down the amount of the national income. (2) The relative 
abundance or scarcity of all the different agents of produc¬ 
tion—Land, Materials, Labor, Capital, Management. (3) The 

^ The best statement to date of the sources out of which increased 
wages may come is found in Hamilton, W. H., and May, S., The Control of 


WAGES 119 

relative abundance or scarcity of all the different kinds of 
labor.” 1 

The fact that labor organizations have been and are to a large 
degree fighting organizations that have been and are almost 
wholly concerned with ^‘short-run” policies has made practi¬ 
cally impossible any careful study on the part of labor of the 
problems of production or of the sources of wage increases, 
whether immediate or in the somewhat distant future. The 
first step in a practical program for raising the level of wages 
permanently seems to be a careful and scientific investigation 
into the sources from which wages come and from which in¬ 
creases may be anticipated. A few labor organizations are be¬ 
ginning to look beyond preparedness for industrial warfare 
toward constructive industrial proposals. One of the hopeful 
signs is contained in ‘^Industry’s Manifest Duty” adopted by 
the 1923 Convention of the American Federation of Labor. In 
part this manifesto reads: “Industry must organize to govern 
itself, to impose upon itself tasks and rules and to bring order 
into its own house. . . . Industry must save itself. Industry 
must find itself. Industry must organize for service, for con¬ 
structive effort, for orderly continuity, for justice to all who 
participate. It must bring itself to a realization of its mis¬ 
sion and to that end it must organize and come together in 
deliberative bodies where the full wisdom and experience of 
all may contribute to final decisions. ” 

Questions 

1. Why do machinists receive higher wages than ditch-diggers? 

2. Why do hodcarriers often receive higher wages than school-teachers? 

3. What does a man earn? 

4. May an increase in wages reduce labor costs? Explain. 

5. “An industrial society in which certain persons are paid $500 per 
day while thousands of their brothers are paid only $3 per day is 
indefensible,” Do you agree? Why? 

1 Pp. 197-198. 


120 


ECONOMICS 


References 

Carlton, F. T., History and Problems of Organized Labory Ch. 8. 
Hamilton, W. H., and May, S., Control of Wages. 

Hobson, J. A., Work and Wealth, Ch. 13. 

PiGOTJ, A. C., The Economics of Welfare, Chs. 12, 14, 19. 
Tannenbaum, Frank, The Labor Movement, Chs. 13 and 15. 


CHAPTER XII 


WEALTH AND INCOME 

Personal Distribution of Wealth. Wealth is a store or stock 
of material economic goods; income is a flow of services and 
goods. Individual wealth may consist largely of claims, such 
as stocks and bonds, to tangible wealth, but the wealth of a na¬ 
tion or a community consists of the goods themselves. To the 
individual, wealth gives power to command income in the form 
of goods and services; it makes possible the satisfaction of wants. 
Estimates of national wealth and of national income in terms 
of dollars are neither very accurate nor of great significance. 
Changes in the value of the dollar, as well as changes in the 
stock of wealth or the flow of income, will change the totals. The 
money value of the wealth of the American nation—factories, 
railways, public utilities, mines, buildings, farms, raw materials, 
finished and semi-finished products, etc.—was estimated, in 
1921, to be about 281 billions of dollars. This huge total in¬ 
cluded the property owned by the various governmental units. 
The distribution of this wealth among the inhabitants of the 
country is very unequal. At one end of the list is the family in 
extreme poverty with practically no property except a little 
clothing, household furniture, and other personal belongings, 
and at the other end is placed the billionaire. In recent decades 
the total of our national wealth has increased greatly, but there 
yet remains a very considerable fraction of the population in 
poverty and without any worth-while claim to wealth. In 1921, 
Dr. W. I. King estimated that of 41 milhon property owners, 
over 5 million owned property valued at $1,000 or less per 
owner. Housewives and minors constituted a large percentage 
of the property-less group, which according to this estimate num¬ 
bered about 67,000,000. Approximately four-fifths of the prop¬ 
erty owners owned individually less than $10,000. The typi¬ 
cal American is not rich, measured either in wealth or in income. 

121 


122 


ECONOMICS 


In a land of many Fords, radios, bathtubs, and golf clubs pov¬ 
erty still lingers. For many prosperity is a myth. It has indeed 
been a myth in recent years for the great army of the un¬ 
employed, for the farmer, for those connected with the textile 
industry, for the soft-coal miners, and for many others. 

National and Individual Incomes. The income of the nation 
is the total of all that the people of the nation produce in goods 
and services over and above an allowance for depreciation. The 
annual income may be calculated by deducting from the gross 
annual production of the nation an allowance for depreciation 
or wear and tear upon the physical equipment used in the con¬ 
duct of business. The most reliable figures of a national income 
available are those presented by the National Bureau of Eco¬ 
nomic Research. The Bureau estimated the “total realized in¬ 
come” for 1928 at 89 billions of dollars, an increase of nearly 
15 billions over 1923, The realized average per capita yearly 
income is about $745. However, this total income is distributed 
very unequally. Of the total realized national income for the 
year 1926 it is estimated that 87.84 per cent was received by 
the lowest 99 per cent of the income receivers; and it is also 
estimated that 12.16 per cent of the total income was received 
by the highest one per cent of the income receivers. The highest 
one-hundredth of the upper one per cent of the income recipients 
is estimated to have received 2.05 per cent of the total realized 
income. It is estimated that in 1926, $2,861,000,000, or about 
$25.00 per capita, was spent by our governmental units in free 
public services—education, libraries, charity, recreation, health, 
sanitation. This sum was dipped out of the national income by 
taxation. It doubtless came in a large measure from those re¬ 
ceiving the larger incomes, but many of the families receiving 
small incomes were the recipients of more than an equal per 
capita share of these free public services. 

Justice in Inequality. Human beings are born unlike and 
unequal, and environment often adds greatly to inborn inequal¬ 
ities. The child of cultured and well-to-do parents will often 
be better nourished, educated, and equipped for the duties 
and responsibilities of active life than the child of less fortunate 
parents. Within reasonable limits inequality in the ownership 


WEALTH AND INCOME 


123 


of wealth and in the receipt of income may be justified on the 
basis of unequal ability and service. We should not overlook 
the fact, however, that heredity is in part past environment, 
and that unequal opportunities and advantages have much to 
do with the apparent differences between those blessed with 
large incomes and those whose incomes are meager and insuffi¬ 
cient. It is difficult to justify on the score of service to mankind 
or of ethical considerations the extreme differences in income 
noted in preceding paragraphs. Great inequality in incomes 
leads to waste on one hand and to want on the other. 

It is true that inequality serves as an incentive to more 
effective effort. A dead level of income and attainments would 
not spur men and women to active endeavor. On the other 
hand, extreme inequality may make for pessimism. Too diffi¬ 
cult obstacles dim hope, destroy initiative, and check active en¬ 
deavor. The heavily handicapped become hopeless; incentives 
fade. At the other end of the economic scale, those born to lux¬ 
ury, the recipients of large and personally unearned incomes, 
also lack effective spurs to active and helpful endeavor. In¬ 
equality of income corresponding roughly to differences in 
ability and to the results of active endeavor makes for progress. 
However, the monetary incentive, as has been indicated, is by 
no means the sole or most potent of incentives. It is conceivable 
that, under proper conditions, other incentives might effectively 
stimulate the energies and ambitions of men, even though 
economic rewards were equal or approximately equal. In recent 
generations inequality of income in the United States has made 
possible savings on a large scale, but the urgent need of large 
yearly increments to the capital of the nation is no longer such 
as to provide a ground for the justification of extreme inequalities 
in distribution. 

In recent years productivity has so increased in the United 
States that engineers and economists are prepared to affirm 
that poverty can be practically eliminated, provided the popu¬ 
lation does not increase beyond the point at which diminishing 
returns appear. The present national income divided equally 
among the families of the nation would lift all out of dire pov¬ 
erty. Nevertheless, further increases in production and in 


124 


ECONOMICS 


national income seem clearly desirable. More capital in the 
form of machinery is needed to complete the lifting of back¬ 
breaking work from the shoulders of mankind and to allow 
further reductions in the length of the working day. More and 
better housing facilities are needed by multitudes of American 
families. Public buildings and educational and recreational 
facilities might well be greatly augmented. Increasing density 
of population requires an increasing public expenditure. We 
are now in position to demand more emphasis upon art and 
beauty. A pioneer people cannot afford to divert energy from 
the necessities to art and the finer things of life, but the United 
States has passed out of the pioneer stage of industrial develop¬ 
ment. More productivity per capita and a reduction in the 
inequality of family income should constitute two important 
items in the program of the “useful art” of economics. 

Questions 

1. Distinguish between wealth and income. 

2. The United States is often called a wealthy nation. Why? What are 
the tests. 

3. Do you believe that inequality of incomes is desirable? Why? 

References 

Bye, R. T., and Hewett, W., Applied Economics, Chs. 23 and 25. 
Chase, S., Prosperity: Fact or Myth. 

Ely, R. T., et al., Outlines of Economics, (5th ed.), Ch. 25. 

Hollander, Jacob H., The Abolition of Poverty. 

King, W. I., National Income and Its Purchasing Power, 


CHAPTER XIII 


STARTING THE BUSINESS AND LOCATING THE 
PLANT 

The Initial Problem. Many businesses fail to make a profit 
and ultimately disappear because they were started in a hap¬ 
hazard fashion, without careful consideration of the prospects 
of business success or failure. The opportunities of financial 
success for a new business enterprise, for a merger of existing 
enterprises, or for the considerable extension of an established 
business should be carefully analyzed before any considerable 
financial commitments are made. This is a job for a business 
analyst. Too frequently business men, would-be investors, or 
promoters are hopelessly optimistic. The new proposals are 
viewed in the best possible light and obstacles are overlooked. 
Too often a glib promoter can induce men with money, especially 
the small investor, to place his funds in a highly speculative 
enterprise which, it is imagined, will presently pay high divi¬ 
dends. 

Projects for starting a new business enterprise may aim to 
produce (1) an article which satisfies an old demand, or (2) a 
substitute for an article now on the market, or (3) a new article 
for which a demand must be stimulated. Obviously uncertainty 
and speculative features are more prominent in projects of the 
second and the third than in those of the first type, but the same 
fundamental points should be considered in all. What are the 
market opportunities for the product under consideration? Is 
the forecast in regard to sales merely a guess or is it based upon 
a careful survey of the field? Do the firms now in the field satis¬ 
factorily meet the demand? If so, is the demand likely to in¬ 
crease steadily? Is the demand affected by fashion or fad? If 
the preliminary analysis of the market be favorable, the atten¬ 
tion should be turned to the reasons for assuming that the new 
firm can enter the field and compete profitably with those now 

> 125 


126 


ECONOMICS 


doing business. Will it possess advantages of location, of near¬ 
ness to raw materials or to markets, or of managerial ability? 
Does it possess valuable patent rights? Can it obtain an ex¬ 
cellent labor supply? Will it be able to get its buildings, land, 
and equipment on favorable terms? 

Is it proposed to begin on a scale which makes for efficiency? 
Certain types of business, such as the iron and steel industry, 
require a large amount of capital for efficient initial operation. 
Other businesses may be started auspiciously with little capital 
and grow as circumstances may dictate. Many a business has 
been started in an ambitious and large-scale fashion because 
its operators are fascinated by bigness and the prestige which 
is popularly supposed to accompany size. Is the present time 
appropriate for investing in a new enterprise or would a post¬ 
ponement until a later phase of the business cycle be advisable? 
These are a few of the obvious items which should be given 
careful consideration before a business is started in competition 
with existing industries. 

In addition, enterprises planned to produce substitutes of 
well-known products or new articles should not be initiated 
until an investigation is made of the probabilities of interesting 
consumers in the article. What will be the probable cost of a 
campaign of advertising and propaganda in the interests of the 
new article? Furthermore, liberal allowances should be made 
for launching any new enterprise on the sea of business—al¬ 
lowances for developmental costs, such as interest on the in¬ 
vestment before the business actually gets started, for designers’ 
and architects’ fees, and money for working capital.^ 

Local Grouping of Industrial Establishments. With improve¬ 
ment in transportation facilities and the reduction of the costs 
of haulage, territorial specialization or geographic division of 
labor has become a mark of industrial progress. Cotton is 
produced in the South, a large portion of the corn crop in the 
^^Corn Belt” of the Middle West, and iron and steel in the 
district along the Great Lakes between Pittsburgh and Chicago. 
Akron signifies rubber; Detroit, automobiles; Troy, collars; 
Minneapolis, fiour; Grand Rapids, furniture; Meriden, silver 

1 See Chapter on Financing Industry. 


STARTING THE BUSINESS 


127 


plate. The manufacturing of the United States has been carried 
on chiefly in the area east of the Mississippi and north of the 
Ohio and Potomac. In recent years it has begun to spill over 
into the South and West. There is also much international 
division of labor. The tropical countries furnish us with products 
that we cannot easily produce. Until a generation or two ago 
England was acting as the workshop of the world. 

With ease of exchanging products each district, section, or 
nation is enabled to devote a large share of its productive effort 
to furnishing a supply of the articles which it is specially adapted 
to produce. A section may make iron and steel products and 
exchange these for food stuffs and clothing that can be advan¬ 
tageously produced elsewhere. Like specialization among the 
working population, territorial specialization may increase the 
total output and reduce the final cost of production and dis¬ 
tribution, providing transportation costs are not excessive. 
The location of industries is, however, ever subject to change 
with the march of events. In the United States the center of 
manufacture moves westward at no great distance from the 
center of population. However, once an industry is well estab¬ 
lished, certain forces tend to make it stay put. Economic tend¬ 
encies which reduce the advantages of the old and increase 
those of a new location are combated by the forces of inertia 
and tradition. A good example is furnished by the present 
tendencies in New England. 

This pioneer manufacturing region of the United States, by 
virtue of certain advantages in earlier decades and because of 
the sustaining power of an early start, has been an important 
center of industry and commerce. In recent years the South 
has been developing cotton manufacture and the West shoe 
factories. The paper industries of New Hampshire and Maine 
are declining, and the marble industry of Vermont is feeling 
the effects of the increased use of concrete and steel m building. 
A relocation and readjustment of industry is in process m New 
England which is painful, but which should afford examples for 
the business manager in other sections. Traditional ideas in 
regard to management and merchandising have been held too 
tenaciously by the New England business man. The rise of 


128 


ECONOMICS 


important iron and steel industries outside the Pittsburgh 
area is another example of the modification of territorial divi¬ 
sion under the pressure of a new economic situation. 

Locating the Industry. After determining that an enterprise 
should be launched, the next question is: Where shall the plant 
be placed? The locating of a new enterprise, or of a new branch 
of an old one, or the relocating of a going concern should be 
carefully studied. Many industries have failed because guess¬ 
work, tradition, or special inducements caused their location 
in a disadvantageous place. Small, but recurrent, additional 
expenses or wastes because of improper placement of the plant 
will weaken any business organization. No enterprise should 
be located and its plant built without a careful survey or audit 
of the location as compared with others. 

The locating of an industry is a scientific problem. The crux 
of the matter is so to locate the factory or store that the unit 
costs of producing and distributing the produce may be re¬ 
duced to a minimum. The expense of a careful survey of the 
situation before locating a plant may easily be saved by elimi¬ 
nating certain wastes due to faulty location. A factory or store 
once located must remain for years. Because of improper loca¬ 
tion it may be subject to certain constant losses which in a few 
years may become in total excessive. A preliminary scientific 
study will pay in dollars and cents. The problem, like many in 
the field of physics, is one of pushes and pulls, of attraction and 
repulsion. A combination of forces acting together or in oppos¬ 
ing directions may be analyzed and measured. Among the 
forces and conditions affecting the choice of a location for a plant 
are: (1) Ease or Difficulty of Access to Raw Materials. What 
are the costs of getting the material to the plant? Will the sup¬ 
ply be exhausted in the near future? (2) Nearness to Markets. 
Will the market be local, national, or world? A careful study 
of market opportunities should be made. What is the danger 
of serious inroads by competitors or by substitutes? (3) Trans¬ 
portation Facilities and Rates. (4) Type of Labor Force Avail¬ 
able. (5) Power and Fuel Supply. (6) Climate. The effect of 
the climate upon the efficiency of workers may be an important 
factor. A warm and moist climate tends to reduce the output 


STARTING THE BUSINESS 


129 


of workers. A fairly warm climate, however, will reduce or 
eliminate the expense of heating the plant. (7) Government 
and Taxes. A stable and well-organized government is essential 
to the development of an industrial civilization. A high tax rate 
may make it inadvisable to select a particular location as com¬ 
pared with another. (8) Banking Facilities. (9) Living Condi¬ 
tions. A low labor turnover and good morale are easier of reali¬ 
zation when the home conditions and surroundings of the worker 
are attractive and healthful. (10) Possibility of Using Build¬ 
ings now on a Certain Site. In dealing with business relations 
involving a considerable number of forces some of which are 
tied up with human relations, the accuracy of the chemist or 
physicist is impossible of attainment. Nevertheless, careful 
study of the problem, an appeal to pertinent statistical informa¬ 
tion, to past experience, and to probable future tendencies must 
be superior to guesswork, tradition, or personal prejudice. 

In attempting to evaluate the importance of different factors 
in a specific kind of industry, a system of weighting might be 
used. The weights assigned would vary with different types 
of industry. The following weighting on a scale of ten was recom¬ 
mended by an engineer in a specific case of a manufacturing 
plant. It illustrates the method which might well be followed 
in other cases. ^ 

1. Nearness to raw material, taking into account transportation 
service and permanence of supply. Weight, Ij. 

2. Nearness to the market, taking into account large cities, trans¬ 
portation facilities, and competitors. Weight, Ij. 

3. Labor market. Weight, 2^. 

4. Power facilities. Weight, 1. 

5. Influence of climate on labor and on product. Weight, J. 

6. Utilization of waste products. Weight, J. 

7. Perishability of raw materials and of finished products. 
Weight, f. 

8. Freight rates. Weight, f. 

9. Legal regulations and restrictions. Weight, J. 

10. Banking facilities. Weight, 1. 

iSee Marshall, L. C., and Lyon, L. S., Our Economic Organization, 
pp. 176-177.' The weights quoted do not total exactly ten units; they are 
used merely to show relative advantages. 


130 


ECONOMICS 


11. Real estate, including value, character of soil, cost of preparing 
site, etc. Weight, f. 

12. Building materials available. Weight, 

Expansion. As the business grows and the market for the 
product widens, should the original plant be enlarged and im¬ 
proved or should one or more additional plants be located 
elsewhere? In the case of a retail store the limit in size is soon 
reached. Chain stores are composed of many scattered small 
units instead of a few large establishments. If the articles sold 
must be seen by the purchasers, obviously the store must be 
easily reached by its customers. Investigation also indicates 
that the most efficient store is not a mammoth establishment. 
Manufacturing industries often find it advantageous to locate 
plants at different points instead of concentrating the industry 
in one place. A large baking company will have plants in many 
cities. The United States Steel Corporation, the big rubber in¬ 
dustries, and automobile manufacturers establish branch plants 
because of market conditions, ease of obtaining raw materials, 
or reduced transportation costs. 

Relocating an Industry. The problem of moving from an 
established location to another is quite different from that of 
locating it in the first instance. Large investments in plant and 
equipment may be sacrificed. An established, well-trained, and 
contented labor force may be disorganized. Certain advantages 
of community good will and financial aid may be lost. A saw¬ 
mill located about twenty miles south of the Strait of Mackinac 
now obtains nearly all of its logs from north of the Strait. The 
mill is not moved because of the disorganization of the labor 
force and of the settled community that would result from 
such a removal. After a decision as to the district in which the 
plant shall be located or relocated has been made, other per¬ 
tinent questions must be considered. Should the plant be placed 
in a city, in a small town, or in the suburbs of a city? 

Large-City Sites. The large city as the location of a manu¬ 
facturing plant possesses the advantage of a considerable and 
varied labor supply. When certain industries are grouped 
around one center, it is usually easy to obtain the specialized 
labor needed. In Detroit are found a supply of workers familiar 


STARTING THE BUSINESS 


131 


with the automotive industry. Subsidiary industries and plants 
are built to utilize by-products. The city usually is favored 
with better transportation facilities and lower freight rates 
than the small town. A larger group of purchasers is at hand, 
and the opportunities for recreation for city workers and their 
families are superior to those provided in a small town. Better 
opportunities for schooling for young workers and the children 
of workers are found in the city. City libraries are prepared to 
give special information about the lines of industry developed 
in the district. On the other hand, the high cost of building 
sites makes it difficult to provide adequately for expansion. 
The tax rates are invariably high. If the streets must be used 
for cartage of raw materials or finished products, the traffic 
congestion may prove to be a serious obstacle. Labor is more 
hkely to be unionized in the city. This fact may not necessarily 
be numbered among the disadvantages of the city. If a city 
or locality is chiefiy concerned with one type of industry, it may 
be severely affected by a depression in that special field. A city 
or town possessing a diversity of industries is given a maximum 
of industrial and financial stability. A one-industry town or 
city is in danger of developing a provincial outlook upon na¬ 
tional and state problems. 

The Suburban Site. A factory site on the outskirts of a large 
city often possesses the advantages without many of the disad¬ 
vantages of a central location. The plant may be placed near 
railway and street railway lines. Tax rates and land values 
will be lower than in the city. Better home sites may often be 
obtained by the workers at lower rentals or lower purchase 
prices. 

The Small-Town Site. The characteristics of a factory site 
in a small town are practically the opposite of those pertaining 
to the large city. In the small town few building restrictions 
interfere with plans for the structure of the plant. The lack of 
social and recreational opportunities is being reduced by the 
automobile, good roads, and the radio. An inconvenient location 
from the standpoint of the employees may result in high labor 
turnover, difficulty in obtaining desirable workers, discontent, 
and lowered shop morale—all of which lead directly to higher 


132 


ECONOMICS 


production costs. Much of the work of town, and, indeed, of 
city, boosters is ill-advised and unscientific. It usually results 
in indiscriminate offers of aid to any industry whether the 
town is or is not a suitable location for the particular en¬ 
terprise. 

Changing Conditions. The factors in the problem of selecting 
the best location of a business establishment are constantly being 
modified, power is being transmitted over longer and longer dis¬ 
tances at low rates, old sources of raw materials are being ex¬ 
hausted and new ones are being discovered, new materials and 
new processes are coming into use, congestion in urban centers 
is increasing and new suburban developments are not infrequent. 
With improvements in transportation facihties, it is feasible in 
many cities to locate a plant in the urban district and operate 
it with employees living in a suburb. The necessity for a large 
volume of production and modern equipment, and the advan¬ 
tages of a large plant, discourage a firm in building branch 
plants. However, with size finally come disadvantages of man¬ 
agement, the labor force must live too far away, and difficulties 
in transporting them to and from work arise. A large fire or a 
breakdown may cripple the entire industry. Decentralization 
is wise when it is desirable to be near markets or near raw mate¬ 
rials that are scattered. Shifts in location come chiefly because 
of the desirability of getting nearer to important growing mar¬ 
kets, better transportation facihties, or more attractive labor 
conditions. The problem of plant location should be studied 
and re-studied from time to time by industrial and mercantile 
organizations. 


Questions 

1. Why is careful consideration of the location of a plant desirable? 

2. Do you know of any industries which seem to be in the process of 
shifting from one locality to another? 

3. Why did the automotive industry develop in Detroit? The rubber 
industry in Akron? 

4. What are the business advantages of the town or city in which you 
reside? 


STARTING THE BUSINESS 


133 


References 

Anderson, A. G., Industrial Engineering and Factory Management, 
Ch. 6. 

Basset, W. R., Taking the Guesswork out of Business. 

Freidrich, C. J., Weber’s Theory of the Location of Industry. 
Gerstenberg, Charles W., Financial Organization and Management, 
Chs. 1, 2, 3. 

Lincoln, E. E., Applied Business Finance, Ch. 3. 

Piquet, J. A., in Factory and Industrial Management, March, 1929. 


CHAPTER XIV 


PLANNING FOR THE BUILDING AND EQUIPMENT 

The Plant Is a Machine. An industrial plant is in reality a 
large tool or machine composed of many interrelated parts. In 
manufacture the building in which the equipment is housed 
and operated is one of the most important parts of the plant. 
In construction work, farming, and mining the equipment is 
not usually utilized within a specially constructed building. The 
content of this chapter, therefore, is of especial interest in the 
study of manufacturing, but certain principles as to the co¬ 
ordination of parts of the production machine are capable of 
broader application. If the building is not properly designed 
and constructed, if the layout of equipment and the transporta¬ 
tion lanes are not well placed, the management will be forced 
to function under handicaps. Industry is very complex; there 
is no standard type of building or of building construction 
which will answer equally well for all varieties of industries. 
The kind of product, cost of materials, land values, the type 
of machinery used, need for light, ventilation, and heating, the 
probability of expansion, and a multitude of circumstances 
make the design of each factory building a special case. Each 
factor in the problem should be carefully analyzed. The factory 
building and its layout should be planned so as to allow the 
management to accomplish the job it is intended to do, effec¬ 
tively and with as little waste as is practicable. Since it is ob¬ 
viously difficult and expensive to make adjustments in the phys¬ 
ical layout of the plant, a building should not be constructed 
until a careful study has been made of the layout of machines and 
departments. The design of the building should be subordinated 
to the methods of utilizing machines and materials within the 
building, and to the comfort and efficiency of the men and 
women who are to be employed under its roof. The building 
134 


THE BUILDING AND EQUIPMENT 


135 


is merely the supporting and containing shell within which the 
active functioning parts perform their respective services. 

While careful planning in the design of a factory building is 
essential, after the project is actually started its quick comple¬ 
tion and early utilization are desirable. Interest charges on the 
investment grow with the increased length of the construction 
period. Flexibility is also requisite in planning for the future of 
any business. The enterprise may expand or unexpected changes 
in demand may occur. A new process or a new form of machine 
may cause the original plan to be no longer the best. Today, 
indeed, “business hath wings.” 

Financial Elements. This is not the place to consider in 
detail the different factors and forces which affect the design 
and layout of a building, but a few features may be alluded to. 
Every industrial problem has a financial element. What are 
the costs? Will it be feasible financially to use this material, 
this plot of ground, or this type of building or machine? Costs 
vary from year to year and from place to place. Where land is 
expensive, as within the limits of large cities, the factory building 
must be as compact as possible and is usually several stories in 
height. In small towns where land is relatively cheap, a one- 
story building is financially feasible. Construction with a saw¬ 
tooth roof admitting light and air is often used. The increased 
use of steel, concrete, glass, and electricity has resulted in re¬ 
markable changes in the type of factory building constructed. 
Where heavy machinery is used, this must usually be placed 
on the ground floor. In certain types of industry gravity can 
be utilized to aid in conveying the material and partially fin¬ 
ished product. In such cases a multiple-story building may be 
desirable. The probable resale value of a building in case it 
should be entirely outgrown should not be entirely overlooked 
while its design is under consideration. 

Idle materials and machines are costly. The storage of raw 
materials and of partially finished products should be cut to a 
minimum. Storage space must be paid for. The speeding up 
of freight movement outside the plant and of material and 
semi-finished articles within the plant cut down inventory and 
storage costs and increase the output of productive equipment. 


136 


ECONOMICS 


In building the plant, this should be kept in mind. Materials 
should move steadily and smoothly toward the end of the pro¬ 
duction process. To carry partially finished products up to one 
floor, then down to another, and then up again is like need¬ 
lessly carrying goods over instead of around a hiU. Meandering 
routes for semi-finished products within a factory are evils similar 
to cross freights on a railway system. Both involve unnecessary 
work and effort, both are costly, both are inefficient from an 
engineering point of view. 

When working on the design of the plant, complete floor 
plans should be made. Cardboard forms or templates made to 
scale are often cut and various methods of arrangement tried 
out. The aisles may be roughly traced. The needs for light, 
ventilation, heating, and for the removal of fumes can also be 
considered. It is easy and inexpensive to make adjustments, 
additions, or reductions while the plans are in the making. 
Careful consideration of the layout before the erection of the 
building starts will often save expensive changes later. 

Shop Transportation. Many production troubles are found 
to originate in bad transportation facilities in the shop. Un¬ 
necessary picking up and putting down of materials and tools 
on the part of workers add greatly to the expense account. Lift¬ 
ing, hill climbing, and “pedestrianism’’ in a plant are cut to 
the minimum by an alert management. It is brains in the plan¬ 
ning room rather than brawn in the shop that count. Conveyor 
systems instead of pedestrian workers are marks of up-to-date¬ 
ness. Conveyors may be so used as to set a reasonable pace; con¬ 
veyors need not mean “frenzied production’’ and the old 
“drive” system. It has been said of one plant in the Middle 
West that “their idea seems to be to make it possible for a one- 
legged man without crutches to hold down any job in the place. ” 

Lighting, Heating, and Ventilating. There is little danger of 
over-emphasizing the importance of properly lighting, heating, 
and ventilating the factory, store, or office building. Output may 
be increased, accidents and sickness reduced, and the good will 
of workers retained by giving proper attention to these factors 
in industrial operation. Plenty of light without glare is the 
ideal. The modern factory is making better provisions for 


THE BUILDING AND EQUIPMENT 137 

natural and artificial lighting than was customary a few decades 
ago. Eyestrain, with its irritating and debilitating consequences, 
is reduced and the quantity and quality of the output increased 
as a result. We are rapidly approaching the time when our 
factories, stores, and office buildings will be kept at a rea¬ 
sonable temperature in summer as weU as in winter. Excessive 
heat or cold interferes with the operation of a plant. Humidity 
of the air is another factor which may be readily controlled in 
the factory of the future. Certain industries, such as textiles 
and food packing, have special temperature and humidity prob¬ 
lems. Poor ventilation will cause a slowing down of endeavor, 
and will increase the number of absences due to colds and other 
forms of sickness. Mental and manual workers cannot do their 
best except in properly lighted, heated, and ventilated work¬ 
places. 


Questions 

1. The factory is a large and complicated machine. Explain. 

2. What are the chief problems involved in shop transportation? 

3. What are the most important advantages of good lighting, heating, 
and ventilating in a factory or store? 

References 

Anderson, A. G., Industrial Engineering and Factory Management^ 
Chs. 7, 8, 9, 12, 13, and 14. 

Atkins, P. M., Factory Management, Chs. 8, 9, 10, 11, and 14. 

Davis, R. C., The Principles of Factory Organization and Management, 
Chs. 3 and 4. 

Dutton, H. P., Factory Management, Chs. 6 and 7. 

Factory and Industrial Management, August, 1929. 


CHAPTER XV 


FINANCING INDUSTRY 

The Single Enterpriser. The methods of financing a business 
vary with the type of business organization. The usual types 
of business organization are three in number: the single enter¬ 
priser, or the individual firm; the partnership; and the corpora¬ 
tion. One man with some savings may start a grocery store or 
a small printing establishment. He rents a building, buys the 
necessary equipment and stock, and hires workers to assist him 
in the enterprise. The enterpriser is responsible for the opera¬ 
tion of the business; he pays for the raw materials, wages, rent, 
and interest on any borrowed money. If he is able to establish 
his business on a fairly profitable and stable basis, he may bor¬ 
row small amounts for a short period of time from the bank. 
These funds he will use to buy raw material or to pay certain 
running expenses. By mortgaging his plant the single enter¬ 
priser may also be able to borrow from individuals relatively 
small amounts of money for increase in equipment and inven¬ 
tory. He may turn back into the plant much of the profits 
received, and thus the business may grow. One man is owner 
and manager; he is responsible for all the debts of the business, 
and he receives the profits, if any, of the establishment. His 
liability is said to be unlimited. In case of a bad business failure, 
he may lose not only his property in the business but also prop¬ 
erty he may possess outside the business. A single-enterpriser 
business rarely becomes very large; it is usually very difficult 
to borrow large amounts of money (capital) for the purpose of 
increasing the size and output of the enterprise. 

Partnership. In the partnership two or more individuals 
agree to operate together a particular enterprise. A partnership 
usually consists of men of somewhat different business experi¬ 
ence; one may be a production man, another an experienced 
salesman, and a third may be an office man who understands 

138 


FINANCING INDUSTRY 


139 


accounting and is familiar with making collections. These men 
pool their capital and experience. Each becomes the manager 
of a portion of the business. Unlimited liability ordinarily at¬ 
taches to each partner. Contracts made in the name of the 
partnership by one of the partners are binding upon the firm. 
It is, as a rule, easier for a partnership to borrow money from 
a bank or from individuals than in the case of a single-enterpriser 
firm. 

The Corporation. The corporation has become the most 
important form of business organization. Practically all of the 
privately operated railways and public utilities of the nation 
are managed by corporations. A large percentage of banks and 
manufacturing plants are organized as corporations. On the 
other hand, few farms are under the control of corporations, 
and an increasing number of mercantile concerns are operated 
under the corporate form. The organization of a corporation 
requires more legal formality than the partnership. An applica¬ 
tion must be made by the group of persons proposing to organize 
a company, to the Secretary of State of the state selected for 
incorporating. This will be made upon blanks provided for that 
purpose. The application will give the name proposed for the 
company, the names and addresses of the incorporators, the 
kind of business to be carried on, the location of its principal 
business oflftce, the amount of stock to be issued, and other de¬ 
tails of the plan of organization. After the receipt of this infor¬ 
mation the state officials will issue to the company a charter or 
certificate of incorporation. The corporation is legally a person 
and may sue and be sued as a corporation. A corporation may 
borrow money and issue bonds in its own name instead of in the 
name of its officers. Its stockholders are not ordinarily liable for 
the debts of the corporation. Liability is said to be limited. A 
stockholder may lose all the money he has put into the business, 
but his property outside the business cannot be attached in 
case the enterprise proves to be a bad financial failure. The 
stockholder in a bank is ordinarily subject to double liability; he 
is liable for an additional amount equal to the par value of the 
stock he owns. If he owns a share of stock the par value of which is 
$100, in case of failure, he might lose $100 more than he paid into 


140 


ECONOMICS 


the bank to obtain the stock. The stockholders of a corporation 
elect the board of directors and this board selects the president 
of the company and is responsible for the policies and manage¬ 
ment of the corporation. Each stockholder is allowed as many 
votes as he owns shares of stock. 

Long-Time Financing. In financing a business short-time 
and long-time credit may be utilized. There is, of course, no 
sharply drawn line of demarcation between the two. Short- 
time borrowing is resorted to for the purpose of buying raw 
material and stocks of goods which are in the ordinary course 
of events soon to be sold, and these debts are paid out of the 
proceeds of the sales. The commercial bank deals chiefly in 
short-time credit. Long-time financing has for its purpose the 
securing of land, buildings, and equipment. A corporation ordi¬ 
narily assembles purchasing power to build its plant, provide 
equipment, and guide the organization over the preliminary 
steps before it actually begins producing commodities by selling 
its stocks, or stocks and bonds. Legally the owner of a share of 
stock is a member of the corporate body; he is a part owner 
of the business. The owner of a bond issued by the same cor¬ 
poration is legally a creditor of the company; he is not a part 
owner. As a matter of fact, the owner of stocks as well as of 
bonds furnishes money or capital to the corporation. Both 
invest their funds in a business, but with different degrees of 
risks and of rights. 

Bonds. Bonds are secured funded debts of a corporation. 
Unsecured notes running for a period of years are also classified 
as funded debts. Bonds are of many types, but in this country 
the chief form issued by a private corporation is a mortgage 
bond. A mortgage is placed on specific portions or on all of the 
property of a corporation. This mortgage is usually deposited 
with a trust company as trustee. Bonds are issued which con¬ 
stitute notes or promises to pay bearing a definite rate of inter¬ 
est, with the mortgage as security. It would be difficult to sell 
a mortgage for $5,000,000 upon the property of a large corpora¬ 
tion, but a split mortgage or bonds of $1,000 each could more 
readily find a market. Five thousand $1,000 bonds may be is¬ 
sued and sold. The security in addition to the promise to pay 


FINANCING INDUSTRY 


141 


$1,000 at some future date and to pay interest regularly in 
the meantime is strengthened by the mortgage upon tangible 
property. 

The bond certificate is a finely engraved sheet of paper set¬ 
ting forth in legal phraseology the conditions under which 
it is issued. It is signed by certain officials of the corpora¬ 
tion. A second-mortgage bond is second in claims on assets and 
interest to the original or first-mortgage bond. A collateral 
trust bond has, in place of the mortgage deposited with the 
trust company as security, certain securities, such as bonds and 
stocks. In case the corporation issuing such bonds fails to pay 
either the interest or the principal sum when due, the trust 
company holding the mortgage or collateral may go into court 
and ask the judge for the appointment of a receiver. A receiver 
would either operate the business in the interests of the bond¬ 
holders or sell it. The bondholder would have a prior claim 
upon the income and assets of the company to the stock¬ 
holder. ‘ . 

A debenture bond constitutes a claim upon the income of the 
corporation prior to that of the stockholder, but it is not pro¬ 
tected by a specific mortgage or lien upon certain tangible prop¬ 
erty. Bonds may also be classified as registered or coupon. A 
registered bond carries the name of the person owning it, and 
his name also appears on the books of the corporation as its 
owner. It can only be transferred by the endorsement of the 
owner. The interest is paid by check sent to the owner. A cou¬ 
pon bond is payable to bearer and has attached to it an interest 
coupon payable to bearer for each interest date up to the time 
the bond is due. When an interest coupon becomes due, it may 
be clipped and the amount due collected from the corporation. 
Sometimes the principal amount of a coupon bond may be 
registered. 

Stock. A stock certificate is also engraved and bears the 
name of the owner. It indicates that the person named is the 
owner of a definite number of shares of the capital stock of a 
corporation. It is signed by certain officers of the company; 
it is also usually countersigned by a registrar and a transfer 
agent. The function of the registrar and transfer agent is to 


142 


ECONOMICS 


make transfers of stock when sold and to prevent frauds and 
counterfeiting in connection with the issuance of stock certifi¬ 
cates. Corporation stock is either common or preferred. Pre¬ 
ferred stock takes precedence over the common stock in divi¬ 
dends and in assets if the company ends its existence. The claims 
of bondholders, however, are prior to those of the preferred 
stockholders. Preferred stock is issued in a variety of forms 
and with many different rights and privileges. It usually bears 
a fixed rate of dividends which must be declared and paid be¬ 
fore the common stockholder may receive dividends. Cumula¬ 
tive 7 per cent preferred stock indicates that 7 per cent divi¬ 
dends will be paid each and every year before common stock 
dividends are paid. If the company does not make enough profits 
to pay the dividend for one or more years and dividends are not 
declared and paid, the entire amount of back dividends must 
be paid before the common stockholders receive dividends. Non- 
cumulative preferred stock merely has a prior claim upon the 
net profits for a given year. 

The common stockholder is the residual claimant. He may 
receive nothing in dividends or he may receive extraordinary 
dividends. Even if large profits are made, dividends may be 
small or even omitted in order that the capital assets of the 
business may be increased. A stockholder, whether common or 
preferred, does not possess any contractual rights to an income 
as does the bondholder. The common stockholders, and some¬ 
times the preferred stockholders as well, have the right to vote 
at the annual meeting of the stockholders. At this meeting 
the members of the board of directors are selected and other 
business is transacted. A bondholder does not possess the voting 
power. 

Very few stockholders attend the annual meetings which 
are often held in a distant city. Shortly before the annual meet¬ 
ing a proxy is sent to the stockholder. He is requested, unless 
he intends to be present at the annual meeting, to sign the 
printed proxy, giving to certain individuals the right to vote 
for him. At the meeting these individuals come in with 
stacks of proxies. The proxy affords a convenient way for 
the group in control of the corporation to continue in power 


FINANCING INDUSTRY 143 

even though they actually own only a small number of shares 
of stock. 

A holding corporation is one organized to buy, control, and 
vote the shares of other operating corporations. If a holding 
corporation controls at least 51 per cent of the stock of several 
operating corporations, it can choose the majority of the board 
of directors in each company and control the different busi¬ 
nesses. Thanks to the use of proxies, 51 per cent is not ordi¬ 
narily necessary for control. A group controlling the majority 
of the stock of a holding company may also control several 
other corporations through the holding company. It is an ex¬ 
cellent device for concentrating control without correspond¬ 
ing concentration of ownership. The line between a holding 
corporation and an investment trust is not always clear and 
distinct. 

The Bookkeeping of a Corporation. In legal terminology, a 
corporation is an artificial person; in accounting practice, the 
corporation is considered to be a unit distinct from the col¬ 
lective group of stockholders and bondholders who are invest¬ 
ors in the industry. The interest and life of the corporation as 
a legal entity and as an accounting unit are pictured as distinct 
from that of the body of investors as well as from that of one 
investor or of any group of such persons. In the bookkeeping 
of a corporation a balance sheet presenting assets or resources 
and liabilities is used. The stock, the surplus, and the undivided 
profits of a corporation are considered as liabilities because such 
items belong to the stockholders. These items represent the 
equity in the business which remains for the residual claimants, 
the stockholders, after all creditors have been paid. All of the 
assets of a corporation are balanced by liabilities or items due 
to the creditors of the corporation or to the stockholders. In 
a corporation balance sheet the totals of assets and liabilities 
are equal. A balance sheet pictures the financial situation of a 
corporation on a given day. The income account presents a 
statement of income and outgo over a definite period of time, 
usually one year. The following balance sheet discloses the 
most important items found in the report of a typical industrial 
enterprise. 


144 


ECONOMICS 


ASSETS 


Real estate 

$300,000 

Plant, equipment, etc. 

700,000 

Patents and goodwill 

200,000 

Investments 

175,000 

Cash 

75,000 

Accounts receivable 

200,000 

Notes receivable 

50,000 

Inventory 

300,000 

Total $2,000,000 


LIABILITIES 


Common stock 

$500,000 

Preferred stock 

500,000 

Bonds 

150,000 

Accounts payable 

75,000 

Notes payable 

225,000 

Surplus 

500,000 

Undivided profits 

50,000 

Total 

$2,000,000 


Real estate, plant, and equipment should be valued conserv¬ 
atively. These items may be recorded as original cost less 
depreciation or at what is considered to be reproduction cost. 
If prices have been rising, the latter may include elements of 
appreciation in value. It is possible to pad the value of the as¬ 
sets of the company by being too optimistic in regard to the 
value of land, plant, and equipment. Patents and goodwill are 
intangible items which are of uncertain value and subject to 
rapid changes in importance to the business. Conservative ac¬ 
counting would place this item at a nominal sum, say one dollar. 
Investments refer to investments in the bonds and stocks of 
other corporations or in governmental securities. These should 
be included at cost or at market price, selecting the one which is 
lower in value. Accounts and notes receivable are short-time 
items upon which the corporation may expect payment in full 
in the near future. Items that are not likely to be paid should 
be written off the balance sheet. Inventories consist of raw 
materials, semi-finished goods, and finished products on hand. 
Inventories should be valued at cost or at market price, which¬ 
ever happens to be lower. 

The bonds, if any are issued by the corporation, are clearly 
liabilities. The bondholder is a creditor of the corporation. 
Accounts payable are short-time items due to firms from which 
raw materials and supplies have been purchased. Notes payable 
are usually due to a commercial bank. The surplus and un¬ 
divided profits may or may not arise out of the earnings of the 
corporation. If a corporation has been making profits as in- 




FINANCING INDUSTRY 


145 


dicated by the income account and has not turned all of the 
profits over to the stockholders as dividends, the amount left 
in the hands of the corporation may be called surplus and be re¬ 
tained permanently as part of the liabilities. An earned surplus 
will first appear on the asset side as cash, but it may be used to 
buy more equipment, additional investments, or additions to the 
inventory. The surplus may be enlarged, however, by making 
excessive allowances for patents and goodwill or by over-valuing 
the land, plant equipment, inventory, or investments. The sur¬ 
plus may be increased by reducing the par value of the stock 
issued. It may be reduced by issuing additional stock to the 
stockholders without requiring any payment. This is called 
issuing a stock dividend. 

A study of the balance sheets of the company for several 
consecutive years, together with information as to the gross 
and net income of the firm, will give a fairly good insight into 
the financial health of the corporation. The items—cash, ac¬ 
counts and notes receivable, and inventory—are the current 
assets; the current liabilities are accounts and notes payable. 
Roughly speaking, the former should be at least twice the latter 
to insure solvency of the company. A considerable increase in 
inventory relative to other items year after year indicates a poor 
selling policy and it shows that an increasing fraction of the 
capital is tied up in an unproductive fashion. Similar increases in 
accounts receivable point to poor collections. Large amounts in 
accounts payable indicate that the corporation is not borrow¬ 
ing at the bank so that it may pay cash to its creditors and 
take advantage of the cash discounts ordinarily allowed. 

Over-Expansion. Many industries have been over-expanded. 
During a period of prosperity many business leaders become too 
optimistic. As a consequence, in normal and subnormal years a 
considerable fraction of the invested capital is idle or only par¬ 
tially utifized. The soft-coal industry is one most evident ex¬ 
ample of over-expansion. It is a mismanaged or “sick” industry. 
A business statistician in 1928 called attention to the surplus of 
“productive capacity” in the textile industry. Similar condi¬ 
tions obtain or are threatened in the iron and steel industry, the 
automotive industry, and the cement business. In the railway 


146 


ECONOMICS 


business the Interstate Commerce Commission has power to 
check reckless expansion. Evidently the American people no 
longer consider that the railways have an inalienable right to 
expand indefinitely. Do the owners of an industrial establish¬ 
ment have an inalienable right to expand indefinitely? Is it not 
reasonable and in harmony with demands of efficiency that the 
police power of the state be stretched to prevent overbuilding 
in fines of industry other than railways? In a well-managed 
manufacturing plant departments are coordinated and dove¬ 
tailed with one another so that there is no over-development in 
one department as compared with another. But we have not as 
yet reached such a happy condition in our national economy. 
A big industrial establishment works out systematic plans for 
obtaining raw materials and motive power and a labor force, 
but there is no national policy for securing regularly the neces¬ 
sities of fife for the people of the nation. A harmonious national 
economy can only be reached as . the result of a study of the 
problems involved and through regulation plus cooperation by 
individual organizations. Through the control of credit or 
through direct regulation are we not warranted in refusing to 
allow any more coal mines to be opened until a situation obtains 
in which the demand for coal reaches the normal output of the 
operated mines when running with a reasonable degree of regu¬ 
larity? The allocation of new capital “is the key to orderly 
growth adapted to the needs of the population.’^ 

Tendencies in the Control of Corporations. Industry, whether 
directed by corporate or by individual management, is a co¬ 
operative affair; it demands teamwork between capital, manage¬ 
rial ability, and labor. The corporation is a legal entity separate 
and distinct from the body of stockholders. As has been indi¬ 
cated, the accountant designates the stock in the hands of the 
stockholder as a liability of the corporation; dividends paid to 
the stockholders are considered to be expenditures. The preserva¬ 
tion of the corporation as an institution and its further develop¬ 
ment often cut across the wishes and aims of stockholders. For 
example, a growing business should accumulate an earned sur¬ 
plus, but, in order to do so, dividends must either be decreased 
or not paid; temporarily the stockholder’s income is reduced 


FINANCING INDUSTRY 


147 


because a surplus is accumulated by the corporation. The wage 
workers employed by a corporation have not as a rule been 
considered as a part of the institution, and little or no effort has 
been expended to secure their interest and loyalty in connection 
with the functions and the preservation of the corporation. 
Strenuous and well-directed efforts are made to sell the products 
of a business to the consumers, but, with few and notable ex¬ 
ceptions, little corresponding effort is made to ^^sell” the cor¬ 
poration to its employees, to gain their interest and hearty 
cooperation. 

In the days of the pioneer and of small-scale business, man¬ 
agement and ownership were united. The owner was the actual 
manager; if he employed wage workers he had direct personal 
relations with them. The business was given the name of the 
owner and manager. It was, in a very literal sense, his business. 
The enterpriser was risking his hard-earned savings in the 
business; he usually put his scanty supply of financial eggs in 
one basket and devoted his entire time and energy to watching 
the basket. Risk-taking, management, and profit-making were 
centered in one owner or a small group of men who were active 
partners. The corporation has made possible a division of the 
various ^^ncidents of ownership.” The function of the enter¬ 
priser no longer devolves upon one man or upon a small group 
of partners. In the typical corporation of today a large number 
of individuals scattered far and wide, taking no active part in 
the management of the industry, are the actual and legal 
owners. These individuals are the stockholders and bondholders. 
They come from almost every class and occupation; there are 
rich and poor, professional men, mechanics, and farmers, men, 
women, and children. 

As the large corporation displaced the earlier and simpler 
business units and as the stock market expanded, industrial 
control gradually drifted into the hands of inactive and absentee 
stockholders, a fraction of whom were primarily speculators. 
Large corporations now number their stockholders by the thou¬ 
sands. Two corporations boast of approximately one-half 
million stockholders. To a large portion of this great army of 
stockholders the purchase of a share of stock is a form of invest- 


148 


ECONOMICS 


ment. They expect only to be silent partners and hope to re¬ 
ceive liberal dividends. These small investors take almost no 
active part in the industry; they may never ride upon the rail¬ 
way or see the outside of the manufacturing plant in which they 
are part owners and, theoretically and legally, part managers; 
they rarely attend a meeting of the stockholders. Their connec¬ 
tion with the industry is reduced to two simple activities: they 
draw dividends, if declared by the board of directors, and once 
a year they sign proxies giving to certain designated individuals 
the right to vote their stock at the annual meeting of the stock¬ 
holders. 

A considerable fraction of the stockholders of a typical large 
American corporation are only temporary owners. Stocks are 
bought and sold regularly on the stock markets. To many pur¬ 
chasers of corporate securities the investment is only a tem¬ 
porary matter. Exactly as there are floating workers who drift 
aimlessly from one job to another without acquiring any stake 
or interest in any business, so there are many stockholders who 
buy and sell their holdings frequently, who drift from one com¬ 
pany to another, who are speculators rather than investors or 
enterprisers. A shifting body of owners is not especially inter¬ 
ested in the goodwill or the reputation of the firm; their prime 
concern is not related to the permanent improvement and 
betterment of the business. Production problems are in danger 
of being subordinated to stock-market speculation, output to 
profits, quality of goods to prices, consumers’ and employees’ 
goodwill to the eager search for immediate dividends. The 
stock-ticker, rather than cost accounting, scientific management, 
and personnel administration is, from the point of view of the 
drifting stockholder, the most important business interest. 
These temporary owners are, as a rule, pleased to have divi¬ 
dends increased at the expense of depreciation, betterment, 
and surplus accounts. It is expected, as a consequence of a 
liberal dividend policy, that the prices of stocks which they 
happen to own may be quoted at a higher market price. In 
that event these transient owners proceed to unload at a profit. 
The disadvantages of a large labor turnover have been given 
much publicity in recent years, but it does not require expert 


FINANCING INDUSTRY 


149 


investigation to disclose the possible disadvantages of transient 
stockholders and a large stock turnover. 

“The separation of ownership and management which is 
increasingly characteristic of the new capitalism has been ac¬ 
companied by an increased concentration of industrial control 
through the development of mergers, holding corporations, in¬ 
vestment trusts and voting trusts, by the purchase of industrial 
stocks by great financial houses, by the growth of the vertical, 
horizontal, and circular trusts, by the issuance of non-voting 
preferred and common stocks, as well as by the diffusion of 
stock ownership among large numbers of the population.” ^ 
Corporation control is tending to pass either into the hands of 
bankers or into the hands of the active management. The 
weakness of central-office, long-distant, impersonally controlled 
big business is growing clear even to the optimistic. The big 
problem is to get the control of industry into the hands of those 
who know what to do and how to do it and who are in position 
to do it and who are interested in the quality and quantity of 
output. It may be suggested that placing the active manage¬ 
ment in control of industry will make for efficiency of opera¬ 
tion. This may involve the changing of absentee and speculative 
stockholders into non-voting investors whose financial rights 
are adequately protected. Is it possible to invent an effective 
and equitable union of management, workers, and investors 
that will at the same time reasonably safeguard the interests 
of the public? 

The Use of the Surplus of a Corporation. If the control of 
large corporations is more and more to drift into the hands of 
the active, on-the-job management, certain questions immedi¬ 
ately arise as to the disposal of the surplus. May not the corpo¬ 
rate surplus be considered as belonging to the corporation and 
not to the stockholders? May not such a surplus be used as 
logically and equitably to benefit the active managers, the 
rank and file of employees, or the consumers as to benefit only 
the absentee and drifting owners of stock in the enterprise? 
Certain corporations have adopted the plan of definite lunita- 

1 Laidler, H. W., The Annals of the American Academy of Political and 
Social Science, May, 1930, pp. li-15. 


150 


ECONOMICS 


tion of dividends, and practically all corporate bonds are lim¬ 
ited to a specified rate of interest. A new business philosophy 
has been hinted at by Henry Ford. Profits should belong prima¬ 
rily to the business; they should be utilized to provide a sounder 
basis for industry and to make possible better working condi¬ 
tions and more regular employment. According to Mr. Ford, 
the active working and managerial force and the consumers 
have claims prior to those of the absentee investors. This al¬ 
most inverts the customary point of view in accord with which 
profits belong to the investors who happen to be common 
stockholders. 

Doubtless the acceptance of such a concept of corporate 
property rights might well carry with it provisions for the 
utilization of a portion of the surplus to assure dividends and 
interest during times of depression and an unemployment in¬ 
surance fund. Is there any good reason, apart from custom, 
why an industry should pay more than is necessary in order to 
obtain funds to be invested in the enterprise? T. E. Mitten of 
the Philadelphia Traction System believed that the big returns 
in industry should go to those who take an active part in up¬ 
building the business—that is, the active management and the 
men. ‘'There is no denial of property rights in this. It is a 
mere recognition of human rights, without which no property 
rights can be maintained. No individual can run one of these 
corporations today. His success depends entirely upon the 
degree of cooperation he receives from every employee of the 
system. In Philadelphia the men did cooperate and that is the 
whole story. They pinned their faith to a broken-down road 
and set out to make it pay. Every man who did that was in 
the best sense of the word a capitalist, and it is to such capitalists 
that the future rewards of industry more and more must go.” 
The plan adopted by the Dennison Manufacturing Company a 
few years ago places the control of the business in the hands 
of the active management as long as dividends are paid to the 
absentee stockholders. 


FINANCING INDUSTRY 


151 


Questions 

1. Draw a contrast between a partnership and a corporation. 

2. How may the surplus of a corporation be obtained? 

3. Suppose a dividend of $50,000 was declared on the common stock of 
the company considered on page 144. What would be the percent¬ 
age? Make the necessary changes in the balance sheet. 

4. Suppose $50,000 of the securities included under investments were 
sold for that sum. What changes should be made in the balance 
sheet? 

5. If a stock dividend of 10 per cent were declared, what changes 
should be made? 


References 

Carlton, F. T., in The Survey, December 31, 1921. 

Dewing, A. S., Financial Policy of Corporations. 

King, Clyde L., Ed., The Annals of the American Academy of Political 
and Social Science, May, 1930, pp. 1-30. 

Lincoln, E. E., Applied Business Finance, 


CHAPTER XVI 


LARGE-SCALE BUSINESS 

The Small Establishment. Our attention is easily focused 
upon the unusual and spectacular to the neglect of the ordinary, 
prosaic, and important features of everyday life. Much is 
written and remarked about gigantic corporations in the United 
States, such as the American Telephone and Telegraph Com¬ 
pany, the General Motors Corporation, and the United States 
Steel Corporation; and we are bombarded by newspaper ac¬ 
counts of big mergers. As a consequence we are coming to 
feel that business in this country is big business. It will not 
be amiss to remind the student that the single-individual enter¬ 
prise, the partnership, and the smaU corporation continue to 
play a considerable role in the field of American business. In 
agriculture the corporation is uncommon; in merchandising, 
in manufacturing, and in construction work the single-enter¬ 
prise business and the partnership are numerous; in railways, 
pubhc utihties, and banking, on the other hand, the corporation 
is nearly supreme. The number of business concerns in 1925, 
according to official figures, was: individual businesses (with 
net income), 978,792; partnership (with net income), 309,414; 
corporations, 430,072; total, 1,718,278. ^ 

In 1931, it is estunated that about one-fourth of all business 
units are corporations. The distribution of manufacturing 
estabhshments, employing six or more wage earners, is shown 
for the year 1923 in the following table. In that year, less than 
one thousand manufacturing estabhshments employed more 
than one thousand wage workers. However, the great basic 
commodities, such as steel and steel products, and textiles, are 
produced in large units. Railways and pubhc utilities are also 
organized on a fairly large scale. The same is true of slaughter¬ 
ing, milling, and tanning. 

^ Lincoln, E. E., Applied Business Finance (4th ed.), p. 27. 

152 


LARGE-SCALE BUSINESS 


153 


WAGE EAENEKS 

NUMBER OP 
ESTABLISHMENTS ^ 

6-20 

54,609 

21-50 

25,212 

51-100 

12,346 

101-250 

10,023 

251-500 

3,835 

501-1,000 

1,784 

over 1,000 

963 


The Sphere of Large-Scale Industry. The potent forces 
which push industry relentlessly on toward larger and larger 
units and combinations of units may be divided into two classes: 
those connected with the elimination of competition, 2 and 
those related to the technology of industry. Standardization 
and speciahzation are only profitable as markets pass from 
local to national and international in extent. Division of labor 
and the growth of large-scale business go hand in hand. A ma¬ 
chine to fashion spokes for wheels would stand idle a large frac¬ 
tion of the year unless a large market for vehicles could be found. 
The overhead expenses of idle machinery would soon wipe out 
the savings due to its use and leave a deficit instead of a profit. 
A highly specialized worker can likewise only be kept working 
steadily in case the sales of the article of which he is a part 
producer are large. Small and local markets allow the profitable 
development of small businesses employing few or no specialized 
workers. As larger and larger markets become available, the 
use of standardization, specialization, semi-automatic and auto¬ 
matic machinery, the use of conveyor systems, and many other 
“labor-saving” devices become feasible from the financial as 
well as the technical point of view. Among the difiiculties con¬ 
fronting large-scale businesses, personnel problems rank high. 
Routine, red tape, and impersonality take the place of personal 
contact between management and men. 

Small business units tend to persist in those industries the 
products of which the consumer insists shall not be highly stand¬ 
ardized, in which the market reached by one business unit is 

^ Recent Economic Changes, p. 168. 

2 Discussed in the Chapter on Value and Price. 


154 


ECONOMICS 


of necessity small, or in cases where it is difficult to assemble 
large quantities of raw materials. The making of automobiles 
is highly centralized, but the repairing of the cars is likely to re¬ 
main relatively decentralized. The individual units constitut¬ 
ing links in a great chain of grocery stores are likely to continue 
to be of moderate size. The store unit in a five-and-ten-cent busi¬ 
ness selling highly standardized articles and not catering to the 
peculiarities of individual taste will be larger than in the case 
of a store catering to customers having a relatively large income 
who demand “exclusive” products. The tailor-make garment 
is produced in a small establishment; the ready-made garment 
is now usually the product of a relatively large factory. Cheese 
factories and creameries are small-scale because of the difficulty 
in bringing a highly perishable raw material from great dis¬ 
tances. While small-scale businesses survive in many lines and 
stand up against the competition of large industrial units, 
large-scale business is here to stay. It tends to develop most 
definitely in those lines in which machinery displaces human skill. 

Forms of Combination. Historically considered, attempts to 
avoid the pressure of competition with its tendencies toward a 
dearth of profits, and to gain the technical advantages of large- 
scale business in production, in buying, and in selling the fin¬ 
ished articles have led to an interesting, almost bewildering, 
and constantly changing variety of combinations and consoli¬ 
dations. The simplest and most informal method of combining 
in order to escape from the inconveniences of competition was the 
pool. The firms organizing a pool retained their separate enti¬ 
ties, but they agreed not to sell below a fixed price, to make a 
definite division of the earnings or of the territory within which 
sales might be made, or to sell through a common sales agency. 
In the United States, the seventies and eighties of last century 
were the period in which pools flourished. As a rule certain 
members of the pool would sooner or later violate the terms of 
the pooling agreement and the combination would come to an 
end. Pools were also declared to be illegal combinations. 

In looking for a more stable form of agreement to ward off 
the evils of competition, some inventive mind devised the 
historical or real “trust.” Stockholders controlling the stock 


LARGE-SCALE BUSINESS 


155 


of several competing companies turned over their stock in 
trust to a small group of ^‘trustees.” The latter acquired the 
right to vote the stock and thus were able to elect boards of 
directors for the different companies, pledged to avoid a com¬ 
petitive struggle. The stockholders received ‘‘trust certificates’^ 
for their stock, and were paid dividends through the trustees. 
This form of combination was more formal and definite than the 
pool, but the courts soon declared the “trust” to be a combina¬ 
tion illegally restraining trade. 

Competing firms thus blocked in their efforts to protect them¬ 
selves from the pressure of competition in some cases formed a 
merger. The original firms gave up their separate charters and 
were formed into one large corporation. This method was legal 
in most cases but difficult of accomplishment. Another form 
of combination was soon evolved known as the holding corpora¬ 
tion. In essence the holding corporation is quite similar to the 
trust. In the place of an extra-legal group of trustees, however, 
was substituted a regularly incorporated organization. At 
least a controlling interest in the stock of the companies com¬ 
bining was turned over to the holding corporation. For this 
stock, shares in the holding corporation were received. The 
board of directors of the holding company could direct the poli¬ 
cies of all the subordinate companies. 

Another device for bringing about unity of action between 
several corporations is that of interlocking directorates. One 
or more men will be chosen to serve on the boards of directors 
of several of the corporations attempting to ward off the pressure 
of competition. Many informal gentlemen’s agreements have 
doubtless led to the adoption of similar policies in regard to 
prices. In recent years two or three hundred examples may be 
found of associations or “institutes” that supply information 
in regard to market conditions, business methods, and the re¬ 
sults of research and investigation. These loose combinations 
are often utilized to oppose or favor certain legislation. Directly, 
however, such associations do not control prices or eliminate 
competition. Cooperative marketing associations have also been 
organized in several industries. One of the best-known of this 
type of combination is the California Fruit Growers’ Association, 


156 


ECONOMICS 


Development of Large-Scale Business. The actual evolution 
of large-scale industry has taken two different directions. 
(1) A business has enlarged by normal increase or by unification 
with its competitors. This is horizontal combination. (2) An 
industry which originally bought its raw materials from other 
enterprises and sold its product to other fabricators or to whole¬ 
salers has reached out both ways until it may control the pro¬ 
duction of the article from the mining of the raw material until 
the finished product reaches the ultimate consumer or the re¬ 
tailer. The United States Steel Corporation was one of the early 
examples of the second or vertical combination or integration. 
This big organization owns iron mines, coking ovens, trans¬ 
portation facilities, blast furnaces, rolling mills, and other 
plants producing a variety of iron and steel products. A chain- 
store group may own factories and farms, perform its own job¬ 
bing or wholesaling functions, and do much of the work of trans¬ 
porting its supplies in trucks belonging to the concern. The 
effect of combination is usually to standardize business meth¬ 
ods and to eliminate certain wastes due to the unnecessary 
handling and transporting of commodities. A large organiza¬ 
tion may prevent cross freighting by filling an order from the 
plant nearest the location of the purchaser. With a large num¬ 
ber of competitors an Eastern concern may obtain an order 
from the West, while Western concerns may ship to the East. 
A vertical combination may easily regulate the flow of ma¬ 
terials into and out of its various establishments so as to give 
greater continuity and smoothness of operation than can be 
given by a considerable group of independent and competing 
firms. 

Viewing consolidations from another angle, we are able to 
discover three reasonably distinct types or levels of industrial 
organization. (1) The establishments or plants—the producing 
units—are large scale or small scale. (2) Separate production 
units are placed under one management. This type of merger 
relates to the scale of management. Chain stores or branch 
banks are illustrations of this variety of consolidation. (3) Hold¬ 
ing corporations, interlocking directorates, and the new form 
of investment trust are examples of the ascending scale of 


LARGE-SCALE BUSINESS 


157 


financial control over a variety of enterprises, frequently of a 
very dissimilar nature. ^ The early trust movement in this 
country had for its chief purpose the stifling of competition 
and the acquisition of monopoly power. The recent merger 
usually makes a call for more capital, floats new securities, 
endeavors to reduce production and marketing costs, and de¬ 
velops a program of national advertising. The fashion of 
forming mergers may easily be carried to extremes. New admin¬ 
istrative and marketing problems arise. Standardization, imper¬ 
sonality, and red tape are in danger of replacing the catering to 
individual tastes, personal relationships, and flexibility of organ¬ 
ization for which smaller establishments are often praised. 
Mere size may be an indication of weakness rather than of 
strength. Before attempting a merger or consolidation the 
situation should be studied carefully. 

Investigations of department stores and of specialized retail 
stores, such as jewelry, grocery, and shoe stores, indicate that 
the minimum cost of doing business is attained in stores of me¬ 
dium size. An increase in size tends to augment the expenses 
of running the business in comparison with the volume of sales. 
In a considerable variety of industries, big and little businesses 
exist side by side in competition. There is such a thing as 
trying for too much gross business,’’ writes Babson, “because 
the point eventually is reached where additional business leads 
to loss in profits rather than gain.” The proper slogan is: 
“Better business, not bigger business.” 

Antitrust Legislation. Before the passage of antitrust legisla¬ 
tion, under the common law which the United States inherited 
from early English practice, contracts intended to restrain trade 
were invalid and unenforceable. Many of our states passed 
legislation directed against “combinations in restraint of trade.” 
In 1890 the federal government, under its constitutional power 
to regulate interstate commerce, passed the Sherman Anti¬ 
trust Act. This famous piece of legislation is still (1931) on 
our statute books. It declared all combinations in restraint of 
interstate or foreign trade to be illegal. Few prosecutions of 

1 Thorp, W. L., General Management Series, No. 92, of the American 
Management Association, 1929. 


158 


ECONOMICS 


combinations of industrial concerns occurred until President 
Roosevelt’s administration. In the American Tobacco and the 
Standard Oil decisions, handed down in 1911, the Supreme Court 
adopted the so-called ^‘rule of reason.” The position was taken 
that only those combinations were illegal under the Sherman 
Act which unreasonably restrained trade, which deliberately 
intended substantially to reduce competition. The American 
Tobacco Company and the Standard Oil Company of New 
Jersey were declared to be combinations unreasonably restrain¬ 
ing interstate trade and were ordered dissolved. It has been 
urged that the Supreme Court of the United States in develop¬ 
ing the rule of reasonableness was actually legislating, a func¬ 
tion delegated to Congress by the Federal Constitution. The 
practical results of these decisions in eliminating monopoly 
and in forcing a return to competition were not of great signif¬ 
icance. In 1920 the Supreme Court refused to order the dis¬ 
solution of the United States Steel Corporation. It was held 
that this giant corporation did not unreasonably restrain inter¬ 
state trade. 

In 1914, Congress passed two measures of significance in the 
field of antitrust legislation—the Clayton Act and the Federal 
Trade Commission Act. The first was intended to clarify the 
Sherman Law. It prohibited local price-cutting and the use of 
exclusive contracts of leases. Holding companies and the prac¬ 
tice of placing the same man, or the same group of men, on the 
boards of directors of competing companies was declared illegal, 
if such practices led to a substantial restriction of freedom of 
trade. The second law of 1914 established a commission with 
powers of investigation into the practices and organization of 
corporations engaged in interstate commerce, except interstate 
carriers and financial institutions. The Federal Trade Commis¬ 
sion is authorized to define, and to issue orders preventing, un¬ 
fair trade practices. The orders of the Commission can be en¬ 
forced only through the federal courts. The Commission has 
done much “to build up and maintain higher standards for 
competitive business methods in general” and to eliminate 
“unfair trade practices.” The Webb-Pomerene Act, passed in 
1918, is a visible manifestation of a new attitude toward busi- 


LARGE-SCALE BUSINESS 


159 


ness combination. The Transportation Act of 1920, authoriz¬ 
ing the Interstate Commerce Commission to draft plans for 
the consolidation of the American railway network into a few 
large systems, is another indication that the era of blind and an¬ 
gry ^‘trust-busting” is temporarily, or permanently, of the past. 
The Webb-Pomerene Act permitted combinations in export 
trade which would be illegal in domestic trade. It was urged 
that combinations of American exporters would be able effec¬ 
tively to cope with foreign competition in the markets of the 
world. There is little evidence indicating that this law has 
especially benefited our export trade. 

Unfair Competition. The Sherman Antitrust Law was de¬ 
signed to smash large combinations. In 1890 large aggregations 
of capital were unusual. Small-scale business and competition 
were accepted as desirable; it was a tradition that competition 
would insure fair prices, good quality of goods, and fair treat¬ 
ment of customers. When the so-called trust suddenly thrust 
itself over the horizon and threatened to interfere with competi¬ 
tion, naturally the first impulse was to kill the monster, turn 
the clock backward, and return to the situation in “the good 
old days.” “Trust-busting” became a popular sport with the 
politicians. Approximately a quarter of a century later the 
Clayton and the Federal Trade Commission Acts indicate a 
change in the popular attitude. The problem becomes one of 
preventing unfair competition on the part of large corpora¬ 
tions. Good trusts may exist; indeed, only the unruly ones 
should be curbed. 

Competition is supposed to make for the survival of the most 
efficient concerns. Unfair competition injures the efficient and 
favors the larger, inefficient, or predatory organizations; it allows 
the survival of the unfit. It is not easy in all cases to draw a 
sharp line of demarcation between fair and unfair competition. 
A particular practice might seem fair in the case of a small 
firm, but be palpably unfair when resorted to by a large and 
dominating business organization. The following practices may 
be safely included as constituting unfair competition: (1) Local 
price-cutting. Prices are cut by a large concern in a locality 
where it faces a local competitor. Elsewhere prices remain 


160 


ECONOMICS 


unchanged. After the local competitor is forced out of business 
local prices are again raised to a profitable figure. (2) The use 
of special brands. This practice is a modification of local price- 
cutting. A special brand of goods is put on the market at a very 
low figure where local competitors are confronted. The special 
brands are not put on the market elsewhere and disappear after 
the competitor drops out. (3) Requiring merchants to refuse 
to handle the goods of a competitor. In this way, the small 
competitor may find his market greatly reduced. (4) The use 
of spies, intimidation, or threats. (5) The existence of subsidiary 
companies disguised as independent and competing firms. 
(6) The use of a uniform delivered price was declared unfair 
in the case of the ‘Pittsburgh plus’’ plan of pricing steel prod¬ 
ucts. The delivered price was fixed at the Pittsburgh mill price 
plus the freight charge from Pittsburgh to the town of the pur¬ 
chaser. This price was maintained even though the steel was 
produced and purchased in Chicago or elsewhere instead of 
Pittsburgh. The steel products thus priced could not be pur¬ 
chased f.o.b. and the freight charges be paid by the purchaser. 
The actual f.o.b., or mill, price would vary greatly in the case 
of purchasers living in different localities. 

From time to time objections are made to “government in 
business.” It is true that history records many pendulumlike 
swings in attitudes toward the right of government to interfere 
with the individual in the interest of the group or in the interest 
of general well-being. At the time the Federal Constitution was 
adopted, the American leaders were adverse to much govern¬ 
mental interference with individuals and business firms. To¬ 
day we have moved quite far from a non-interference policy. 
Reverting to the attitude recently assumed toward unfair com¬ 
petition, it may be asserted that the amount of governmental 
interference with business policies depends in no small measure 
upon the attitude of business toward consumers and workers. 
The industry that avoids unfair practices, that treats its cus¬ 
tomers and workers with consideration, that develops pur¬ 
poses and aims other than immediate monetary gains will not 
in the near future be in great danger of excessive govern¬ 
mental interference. 


LARGE-SCALE BUSINESS 


161 


Questions 

1. Differentiate between “fair” and “unfair” competition. 

2. “Increasing the size of an establishment always lowers the costs of 
doing business.” Do you agree? 

3. What was the Sherman Antitrust Law? Should it be repealed? Why? 

References 

Bye, R. T., and Hewett, W., Applied Economics, Ch. 5. 

Edie, L. D., Economics: Principles and Problems, Ch. II. 

Ely, R. T., et al.. Outlines of Economics (5th ed.), Ch. 27. 

Seager, H. R., and Gulick, C. A., Trust and Corporation Problems. 
Sharfman, I. L., in the American Economic Review, Supplement, 
March, 1926, pp. 204-205. 

Thorp, W. L., in Recent Economic Changes, Pt. 3, Ch. 2. 


CHAPTER XVII 


MONEY AND CREDIT 

What Is Money? We are living today in a money—or credit 
economy. Goods and services are exchanged or sold for money, 
and with the money received other goods and services are pur¬ 
chased. Barter, or the direct exchange of goods or services for 
other goods or services, is almost unknown. Wage workers are 
not paid for their services directly in shoes or shelter; wages 
first take the form of money or credit. Money is a tool which 
enables people to make exchanges easily. Barter or exchange 
without the intervention of money had many inconveniences 
and the gradual introduction of money constituted an impor¬ 
tant step in human progress. Money is not wanted for itself; 
it is desired because its possession amounts to purchasing 
power. Money or credit spells ability to obtain goods and 
services; it is a representative of other goods. It is clear that 
money or credit cannot be consumed. People living in a com¬ 
plex interdependent society actually desire not the money but 
the commodities which can be bought with the money or the 
credit. 

The Functions of Money. One important function of money 
and credit is to keep the great industrial plant called the United 
States of America operating steadily. If, in a time of depression, 
the American people cannot purchase the goods they them¬ 
selves are able to produce by utilizing the gigantic industrial 
mechanism of the nation, money is not performing completely 
its function as a tool for facilitating exchanges. Other functions 
of money are those of acting as a medium of exchange, as a 
storehouse of value, and as a standard of deferred payments. 
The first money was a commodity which was valuable and 
quite generally desired. Before used as a medium of exchange 
for trading purposes, certain commodities were doubtless used 
for gifts, tribute, ornaments, and in religious ceremonials. 

162 


MONEY AND CREDIT 


163 


These articles were recognized as generally desirable and became 
the first forms of money. Some ingenious primitive man, who 
had difficulty in trading some commodities he possessed for 
something he wanted, hit upon the device of trading for a gen¬ 
erally desired commodity, such as arrowheads, beads, cattle, or 
cubes of salt. He then sought someone having the article he 
wanted and exchanged his money commodity for the former. 
General acceptability is a characteristic of money. 

Money is also a valuable yardstick by means of which the 
value of commodities and services may be measured. Unfor¬ 
tunately the money that modem peoples use as a yardstick or 
measuring unit fluctuates; it is not stable or fixed as is the yard 
or the pound. We attempt to measure value in terms of a defi¬ 
nite weight of metal—gold. A dollar is always a certain weight 
in gold of a standard fineness; but dollars do not always purchase 
the same quantity and quality of goods and services. The dollar 
fluctuates in purchasing power; it is a variable yardstick for 
the measurement of value. A certain number of dollars returned 
in payment of a debt may purchase more or less than when 
originally loaned. This tendency to fluctuate in value is espe¬ 
cially undesirable in connection with the third function of 
money—that of acting as a standard of deferred payments. 
Money is used as a standard of deferred pa 3 mients when goods 
and services are sold and the purchaser agrees to pay for them 
in money at some future date. Figuratively speaking, accord¬ 
ing to Professor Kemmerer, if our yardstick of value was 
36 inches in length in 1879, when the United States returned 
to a gold basis, it was 45 inches long in 1896, 13|^ inches in 
1920, and 21 inches in the fall of 1927. Over a period of half 
a century the gyrations of our yardstick of value, the gold dol¬ 
lar, are quite remarkable and disquieting. 

Types of Money in the United States. This country and 
nearly all other important nations have adopted the gold 
standard. Gold of a certain weight and fineness constitutes the 
basic or standard money. Other types of money are directly or 
indirectly redeemable in gold. In gold standard countries gold, 
and gold only, is admitted to free coinage; that is, the govern¬ 
ment agrees to accept all the gold of proper fineness which is 


164 


ECONOMICS 


brought to the mint. There is no legal hmitation upon the 
amount of gold which may be accepted by the government 
mint. In the United States no charge is made for minting gold 
if it is of the proper fineness when presented at the mint. Tech¬ 
nically speaking, gold coinage in this country is free and gratui¬ 
tous. The American gold dollar is a coin weighing 25.8 grains of 
nine-tenths fineness, or it contains 23.22 grains of pure gold 
with some alloy to make it durable. The gold dollar is not 
actually coined. Gold is only coined in larger denominations. 
The gold dollar of standard weight and fineness is our univer¬ 
sal legal tender for the settlement of aU payments. As long 
as free and gratuitous coinage of gold continues, there can 
be no important difference between the value of coining gold 
and gold bullion. One is freely convertible into the other. 

Other forms of money now issued in the United States are 
gold certificates, silver dollars, silver certificates, subsidiary 
coins. United States notes (greenbacks), national and federal 
reserve bank notes, and federal reserve notes. A gold certificate 
circulates instead of gold. There is deposited in the United 
States Treasury a dollar in gold for every dollar of gold certif¬ 
icates in circulation. The gold certificate is essentially a ware¬ 
house certificate. The silver dollar contains 371.25 grains of 
pure silver. Only a limited amount of silver is coined; silver is 
not admitted to free coinage. The silver in the silver dollar is 
not actually equal in value to the gold dollar, but it is main¬ 
tained at par because of the limited number in circulation and 
by the legal obligation of the Treasury to keep all kinds of 
money at a parity. In actual practice the silver dollar is re¬ 
deemable at par in gold. The silver certificate is also merely a 
warehouse certificate indicating that the Treasury is holding 
in its vaults a silver dollar for every dollar circulating in the 
form of a silver certificate. The smaller coins—half-dollars, 
quarters, dimes, nickels, and pennies—are put into circulation 
in limited quantities for convenience. They are actually worth 
less than their face value and are maintained at par because 
the Treasury is prepared to redeem them in gold. United States 
notes, or greenbacks, are promises to pay issued by the federal 
government. They are payable to bearer and do not draw in- 


MONEY AND CREDIT 


165 


terest. Greenbacks were first issued during the Civil War. They 
were not at first redeemable in gold. Since January 1, 1879, the 
Treasury has been prepared to redeem the greenbacks at par 
in gold. Consequently they are maintained at a parity with 
gold. The number in circulation is fixed by law at $346,681,016. 
For the redemption of these notes and other forms of money 
the Treasury maintains a reserve of gold in its vaults. Directly 
or indirectly, all forms of money issued by the federal gov¬ 
ernment are redeemable in the standard money—gold. The 
national bank notes, the federal reserve bank notes, and 
the federal reserve notes are discussed in the chapter on 
banking. 

Credit. In recent decades credit has become an important 
tool of exchange. Many transactions are settled without the 
use of money; credit instruments—checks, drafts, bills of ex¬ 
change, travelers’ letters of credit—are used. Indeed in some 
cases, a check is not given, but the recipient of wages or other 
income is given an additional credit on the books of the bank 
in which he has a deposit. This is accomplished by means of an 
order given to the bank by the company making the payment. 
In essence, a bookkeeping transaction occurs within the bank. 
One account is reduced and another increased, but purchasing 
power is transferred. In other transactions, the time element be¬ 
comes important. Goods, materials, and services are exchanged 
for promises to pay at some future date—notes, bonds, ac¬ 
ceptances payable at a definite date, etc. Business men and cor¬ 
porations borrow money; that is, purchasing power is turned 
over to them for a promise to pay, at some future date, the 
original sum and an additional amount as interest. The lend¬ 
ers lose for a designated period the right to use this purchasing 
power. In reafity, when “money” is said to be borrowed, when 
a credit transaction takes place, the real borrowing is that of 
purchasing power, or, more accurately, it is borrowing the equip¬ 
ment and building obtained by using in the market the bor¬ 
rowed purchasing power. Return payment, however, is in money 
or a credit equivalent—purchasing power. Business men bor¬ 
row purchasing power in order to obtain supplies or in order to 
build factory buildings and buy machinery. The lenders tempo- 


166 


ECONOMICS 


rarily give up their present purchasing power for a promise to 
return it at some future date with interest. 

Price Fluctuations. Since 1800 there have been in the United 
States three peaks in a curve of general prices. These three 
periods of high prices and low purchasing power of the dollar 
are coincident with a war epoch—1812—1814, the Napoleonic 
Wars and the War of 1812; 1864-1866, the Civil War; and 1920, 
the World War. After the first high point, about 1814, prices 
fell irregularly for approximately thirty years. Again, after the 
Civil War peak prices tended downward until 1896. Since 1920, 
the general trend has also been downward. The drop in prices 
was very abrupt from May, 1920, t o January, 1922. This down¬ 
ward sweep was followed by a slight recovery. Since 1926 
(December, 1930) the trend has been slowly downward. Irving 
Fisher’s wholesale price index for 200 representative commodi¬ 
ties illustrates clearly the trend o f prices and of the purchasing 
power of money in recent years. The average for the year 1926 


is used as 100. 

INDEX NUMBER 

PURCHASING POWER 

YEAR 

OP PRICES 

OP THE DOLLAR 

1913 

69.8 

143.3 

1920 (May peak) 

167.2 

59.8 

1922 (January low) 

91.2 

109.6 

1924 

98.9 

101.1 

1926 

100.0 

100.0 

1927 

94.2 

106.2 

1928 

98.2 

101.8 

1929 

96.3 . 

103.9 

1930 (February) 

92.7 

107.9 

1930 (Week ending De¬ 
cember 19) 

79.4 

126.0 


Effects of Price Fluctuations. The effects of an unstable 
monetary standard are inconvenient and often tragic. A man 
purchases what seems to be a sufficient amount of life insurance 
to provide adequately for his family in case of his death. If, 
however, prices rise, the purchasing power of the insurance 
dollars falls. An income that was adequate in 1910 was meager 
in 1919 because the dollar had depreciated in purchasing power 


MONEY AND CREDIT 


167 


over 50 per cent. Persons having fixed incomes in dollars are 
injured when prices rise and benefited when prices are tending 
downward. If an investor buys a bond due in ten years and the 
price level rises during that period, he loses because the dollars 
paid to him will purchase less than the dollars he parted with 
to buy the bond. Debtors lose in a time of falling prices; it is 
more difficult for them to get the dollars with which to repay 
the loan. Each dollar of the debt has appreciated in value—in 
purchasing power. The inventories of a manufacturing plant 
consisting of raw material, semi-finished products, and finished, 
but unsold, products tend to become less and less valuable in a 
period of falling prices. With good and dependable transporta¬ 
tion facilities, a hand-to-mouth buying policy is desirable and 
profitable for the manufacturer and merchant in a time of fall¬ 
ing prices. A long period of rising prices leads the merchant 
and manufacturer to be careless in buying raw materials and 
stocks of salable goods. 

A Stabilized Currency. A currency which fluctuates little in 
value is highly desirable. Gold fluctuates in value from time to 
time, but relative to other commodities it exhibits a considerable 
degree of stability. Gold used as a money constitutes a large 
supply which is used over and over again. The new gold mined 
each year is only a small fraction of the total gold monetary 
supply in the world. Consequently the total supply of gold 
cannot be increased or decreased rapidly. At present there is 
no excellent reason for anticipating large increases in the amount 
of gold mined yearly. There are, however, several plans ad¬ 
vocated for greater stabilization of the currency, but, unless 
another world war occurs, there is a reasonable basis for the 
opinion that we shall not in the United States in the near future 
experience violent or considerable changes in the purchasing 
power of the dollar. The suggestion may be made that slight 
reductions in the price level may be anticipated during the 
next decade. 


168 


ECONOMICS 


Questions 

1. What are the chief functions of money? 

2. Does the price of gold fluctuate? 

3. What interests are injured when the price level rises? 

4. Who are beneflted? 

5. Why is the value of gold more stable than that of iron or coal? 

References 

Edie, L. D., Economics: Principles and Problems, Chs. 25 and 26. 
Ely, R. T., et aL, Outlines of Economics, (5th ed.), Ch. 13. 
Lawrence, J. S., Stabilization of Prices. 

Moulton, H. G., Financial Organization of Society. 

Taussig, F. W., Principles of Economics, Chs. 17-23. 


CHAPTER XVIII 


BANKING 

The Function of a Commercial Bank. The business of operat¬ 
ing a commercial bank is considered by the community to be 
different from other types of industry. There is much compe¬ 
tition in banking, but it is insisted that fairly rigid regulation 
is nevertheless required. It is impossible to start or to operate 
a banking business as informally as a grocery store. The com¬ 
mercial bank is assumed to be affected with public interest. 
Confidence is generally essential in successful banking. A fail¬ 
ure of one or two banks causes a cloud of suspicion to hover 
over all the remaining banks in the immediate district. Confi¬ 
dence in the integrity of the managers and in the solvency of 
the business is less significant in other lines of business en¬ 
deavor. The bank primarily deals in credit, and credit rests in 
no small measure upon confidence. The function of a commercial 
bank is that of ^‘manufacturing credit.” More accurately, how¬ 
ever, the bank is organized to transform personal credit into 
more generally accepted bank credit in the form of paper 
money or of deposit rights upon which checks may be drawn. 
The explanation of this statement may be presented with 
greater lucidity after an outline of the historical evolution of 
banking has been studied. Another function of a commercial 
bank is usually the safe keeping of securities. Commercial 
banks may also have trust, bond, and savings departments, 
but these departments are features outside the work of the 
commercial bank in its restricted form. 

The Origin of Banking. The modern commercial bank traces 
its origin back to the goldsmiths of England, about the middle 
of the seventeenth century. Its first function was that of fur¬ 
nishing a reasonably safe place for keeping gold and silver. The 
goldsmiths of those days possessed strong boxes in which they 
kept their supplies of gold. Presently others, fearing robbery, 
169 


170 


ECONOMICS 


asked the goldsmith to keep their money and valuables in his 
strong box. In that event, the goldsmith would give the depos¬ 
itor a receipt for the gold deposited. Ere long some ingenious 
depositor, finding it necessary to make a payment in a business 
transaction, took his creditor to the goldsmith’s place of busi¬ 
ness and transferred part of his gold. He received a new 
receipt reduced by the amount he desired to pay to his cred¬ 
itor. The latter might take the gold or he might leave it with 
the goldsmith. In this simple and primitive fashion arose 
the plan of deposits in banks and the payment of debts by 
checks. 

At first the goldsmith was expected to return the identical 
gold coins which were left with him, but he soon discovered 
that not all of his customers came to get their deposits at the 
same time. It became possible for the goldsmith, the original 
banker, to loan temporarily for a fee—interest—a portion of 
the amount left with him for safe keeping by business men and 
others. If one of the depositors came in and asked for his gold, 
the goldsmith paid him out of the store on hand, but no longer 
paid back the exact coins deposited in his strong box. Originally 
this was an irregular practice of doubtful character, but it has 
become the regular and expected practice. A bank never keeps 
on hand cash equal to the amount of its deposits. 

The Balance Sheet of a Bank. Banks are organized as cor¬ 
porations. Their charters are granted under special safeguards 
not thrown around industrial corporations. National banks 
are chartered by the federal government. Others, called state 
banks, are chartered by state authorities. National banks, 
and state banks also, are subject to official inspection and are 
required to make periodical reports as to their business. Banks 
are not allowed to water their stock. One hundred dollars 
must be paid in for every one hundred dollar share. Banks 
are required to build up a considerable surplus. On the fol¬ 
lowing page is a simplified balance sheet of a small state 
bank. This balance sheet is similar in form and content to 
that of a corporation engaged in the manufacture of some 
commodity.^ 

1 Refer to page 144. 


BANKING 


171 


RESOURCES 


LIABILITIES 


Loans and discounts 
U. S. bonds, etc. 
Bank building and 


1457,499.33 Capital stock 

256,580.88 Surplus and undi¬ 

vided profits 
50,000.00 Deposits 

Bills payable 

96,854.59 


$100,000.00 


95,995.70 

589,939.10 

75,000.00 


fixtures 

Cash on hand and 


in banks 


$860,934.80 


Total 


$860,934.80 


The loans and discounts consist chiefly of notes and acceptances 
due from individuals and firms to the bank. These are usually 
short-time paper running from 30 to 90 or 120 days. The 
deposits are owed by the banks to their depositors; the bills 
payable are due to outside; parties. The capital stock and sur¬ 
plus and undivided profits are the stockholders’ financial in¬ 
terest in the bank. 

The Bank’s Business. With this simplified balance sheet 
before us, let us study the way in which a bank actually manu¬ 
factures credit. Suppose a local merchant wishes to borrow 
in order to buy a new stock of goods for his store. By borrow¬ 
ing at the bank he is able to obtain a discount for cash pay¬ 
ments. This firm, it is assumed, has been doing business with 
the bank and carries a deposit there. The officials of the bank 
have intimate knowledge of the firm’s business. They know the 
firm is making profits and is doing an excellent business. The 
merchant explains the reason for wishing this particular loan. 
He expects to be able to dispose of the purchase under considera¬ 
tion within ninety days. The bank is willing to lend $10,000 
to the merchant for 90 days at an interest rate of 6 per cent. 
A note for that amount and duration is signed by the merchant 
payable to the bank. The merchant does not ordinarily desire 
cash; he wishes the amount he has borrowed added to his deposit 
so that he can draw a check upon it payable to the firm from 
which he is buying the merchandise. Usually the bank deducts 
the interest at the beginning of the transaction; therefore, the 
bank adds to the merchant’s account or deposit $10,000 minus 
6 per cent interest for 90 days, which is $150; or $9,850 is added 
to the deposit of the merchant. The $150 is profit for the bank 




172 


ECONOMICS 


and is added to the surplus and undivided profits. The following 
changes must now be made in the balance sheet: on the side 
of resources, $10,000 is added to the loans and discounts; on 
the side of liabilities, $9,850 is added to deposits and $150 to 
undivided profits. In this fashion, the bank has changed the 
small firm’s credit into generally accepted bank credit. In early 
days before the check was used as a means of payment, the 
bank would have issued paper money for the note and the debt 
would have been paid with bank notes. 

A commercial bank is daily making such transactions, and 
each day notes which come due are being paid. This brief 
statement paints a picture of the normal processes of a com¬ 
mercial bank. The bank must keep a reasonable amount of 
cash on hand to meet the requirements of the depositors who 
may demand cash. This is technically called the bank’s reserve. 
Banking laws fix a minimum percentage of reserve (cash) in 
relation to the deposits. Depositors increase their deposits by 
making deposits of cash or of checks, or by borrowing from the 
bank. Depositors reduce their deposits by drawing checks upon 
the deposits or by drawing out cash. 

Credit Instruments. Notes, checks, and trade and bank 
acceptances are the chief forms of credit instruments used in 
connection with short-time loans made by commercial banks. 
A promissory note is a promise to pay at a future date for value 
received, a certain sum of money. A note is ordinarily negoti¬ 
able; it may by endorsement be made payable to a third party. 
The great bulk of the “loans and discounts” of a bank consists 
of notes. A check is an order to pay. The drawer authorizes 
the bank in which he has a deposit to pay a sum of money to a 
third party named on the face of the check. Checks may be 
drawn payable to self or to cash, in which case, unless endorsed 
to a third party, the drawer receives cash for the check at the 
bank. When the bank pays a check, the amount called for is 
deducted from the deposit of the drawer. 

Acceptances are also orders to pay. A manufacturer may 
buy raw materials for his plant. Instead of paying cash, he 
may be carried on the books of the selling concern for a period, 
or a trade acceptance may be used. In case the latter method 


BANKING 


173 


is employed, the seller draws the acceptance ordering the buyer 
to pay the drawer or order, because of a purchase of merchan¬ 
dise, the sum due at some future date, usually not more than 
ninety days from date. This order is sent to the buyer; he 
writes accepted across the face and signs underneath. The ac¬ 
ceptance is returned to the seller, who is the drawer of the accept¬ 
ance. He may keep it as a current asset of the business until 
paid, or, if he wishes money at an earlier date, he may take it 
to his bank. After the drawer has endorsed the acceptance, the 
bank will discount it exactly as a note of the seller and endorser 
would be discounted. If the purchaser and acceptor does not 
pay when the acceptance is due, the seller and endorser is held 
responsible by the bank. A bank acceptance is one in which 
the acceptor is a bank. If the buyer is practically unknown to 
the seller, the latter may refuse a trade acceptance. Conse¬ 
quently the buyer may go to his bank and furnish acceptable 
security, after which his bank may agree to accept an order 
drawn upon it for the amount of the purchase. When due, the 
bank is primarily responsible for the payment. 

National Banking System. Our system of national banks 
traces its origin to the exigencies of the Civil War period. Before 
that eventful epoch banks were incorporated under state au¬ 
thority. These banks were in many cases badly organized. 
Their paper money and credit were of uncertain value. Early 
in the history of the nation two attempts to put banking on a 
firm foundation were made by the federal government. The 
first United States Bank, 1791-1811, and the second United 
States Bank, 1816-1836, were organized to act as the fiscal 
agents of the federal government and to place a restraining 
influence upon the reckless state banks. There was much opposi¬ 
tion to banks during the pre-Civil War period. The opposition 
which in more recent years has been manifested toward trusts 
as monopolies was then directed toward banks and the “money 
monopoly.^’ 

The National Banking System was organized in 1863 in order 
to assist in financing the War. Two specific purposes were in 
the minds of the advocates of this plan. It would provide a 
safe and reasonably stable currency and it would provide a mar- 


174 


ECONOMICS 


ket for federal bonds. Presently the state banks which continued 
to do business alongside the many national banks were taxed 
10 per cent upon issues of paper money. This federal tax was 
prohibitive, and the state banks stopped issuing paper money. 
Before the establishment of the federal reserve banks the only 
bank notes in circulation were national bank notes. The na¬ 
tional banking system was decentrahzed. One national bank 
was independent of any other bank. It was not allowed until 
recently to have branches. These banks were regulated and 
periodically inspected by officials of the Treasury Department. 
A rigid reserve ratio was fixed by law and the issuance of paper 
was carefully safeguarded. 

The national banks were required to buy certain amounts 
of government bonds. These could be issued as the basis of 
bank-note circulation. If a national bank issued $100,000 of 
bank notes, it was required to deposit bonds whose par value 
was $100,000 and an additional 5 per cent of the amount in 
cash in the Treasury of the United States. It would then be 
furnished with bank notes printed and engraved by the Depart¬ 
ment to the amount of $100,000.^ National bank notes were in 
this fashion made secure. A national bank might fail and its 
depositors lose, but the holder of its bank notes was protected. 
However, the total amount of these bank notes in circulation 
did not change much from month to month or from season to 
season. They were relatively inelastic. This inelasticity of the 
paper money issued by national banks was one weakness of the 
system. 

Another and more important difficulty grew out of the rigid 
reserve requirements. When the deposits of a bank increased, 
it was necessary to increase the cash reserves of the bank. If 
unusual demands were made, a bank, or many banks, might 
reach the reserve limit. In that case a bank must refuse to lend 
even though the security offered be good. The reserve limit be¬ 
came a dead line. As a consequence, periodically money and 
credit stringencies arose. Under the national banking system 

^ Provided bonds were not selling below par. Bonds eligible for bank¬ 
note security have not fallen below par in many years. Liberty and Vic¬ 
tory Bonds may not be used as a basis for bank-note circulation, 


BANKING 


175 


before the Federal Reserve System was adopted, bank credit 
was quite inelastic. This two-sided matter of inelasticity was 
the great weakness of the old national banking system. 

The Federal Reserve Banking Plan. The Federal Reserve 
Banking System was put into operation in 1914. It did not do 
away with the national banks; it was added to the older system. 
The plan is a compromise between the old, decentralized na¬ 
tional banking system and a powerful central bank with 
branches scattered throughout the nation. There are twelve 
federal reserve banks located in as many districts. All national 
banks must own stock in the reserve bank of the district in which 
they are located. All the legal reserves of the member banks 
must be kept in the federal reserve banks. State banks may be¬ 
come members of the system. Three of the nine directors of 
each federal reserve bank are selected by the Federal Reserve 
Board located at Washington. This board possesses other im¬ 
portant regulatory powers. It consists of eight members—the 
Secretary of the Treasury, the Comptroller of the Currency, 
and six appointive members. 

The chief benefits resulting from the new plan are: (1) it 
gives some elasticity to the bank-note circulation, (2) elastic¬ 
ity has been provided for bank credit, (3) in times of emer¬ 
gency, cooperation between banks is definitely provided for, 
and (4) bank clearings are handled more systematically. 

Elasticity to the circulating medium is imparted through the 
issue of a new form of paper money, the federal reserve note. 
These bank notes are issued only by the federal reserve banks. 
They are secured by 100 per cent short-time commercial paper, 
by 40 per cent gold reserve in the federal reserve bank, and 
the credit of the federal reserve bank issuing the note. These 
notes are amply secured. If a member bank wishes to obtain 
more currency, it will send some of its good short-time com¬ 
mercial paper to the federal reserve bank for rediscount. 
This commercial paper is held by one of the board of directors 
acting as the agent for the government. Federal reserve notes 
to the value of the rediscounted notes are sent to the bank. 
In this way additions are made to the circulating medium. 
When the short-time paper is due, if the demand for money in 


176 


ECONOMICS 


circulation has eased, reserve notes may be sent in payment— 
thus taking them out of circulation. One other method of taking 
the federal reserve notes out of circulation is provided for. If a 
note issued by one of the federal reserve banks reaches any one 
of the other eleven banks, the notes are returned to the bank of 
issue. The increasing use of checks to make payments is reduc¬ 
ing the importance of elasticity in the issue of paper money. 

It was pointed out in a preceding section that under the old 
national banking system the reserve limit became a dead line. 
This difficulty was overcome by providing for the rediscounting 
of good commercial paper by a federal reserve bank. If a mem¬ 
ber bank, whose legal reserves, it will be recalled, are in the 
federal reserve bank, has increased its deposits until the legal 
limit of reserves is approached, it may send some of the notes 
held among its loans and discounts to the reserve bank for re¬ 
discount. The sum due the bank because of the surrender of 
the notes is added to the legal reserves of the bank. It is now 
able to make more loans and, as a result of loaning, to increase 
its deposits several times the increase in reserves. The legal 
reserves of a member bank are 13 per cent in “central reserve 
cities,’’ 10 per cent in “reserve cities,’’ and 7 per cent elsewhere. 
In a reserve city, such as Cleveland, a bank could increase its 
deposits ten times the proceeds of the rediscounted notes; in 
smaller cities and towns the increase could be as much as four¬ 
teen times. In this manner a considerable degree of elasticity 
is imparted to bank credit. The federal reserve banks must 
keep a gold reserve of 35 per cent against the deposits of member 
banks. In times of stress this percentage may be lowered. 

The process of rediscounting is simple. The note which was 
originally payable to the bank is now endorsed by the bank 
and made payable to the federal reserve bank. The interest or 
discount for the period remaining before due is subtracted 
from the face of the note and the bank is credited with the re¬ 
mainder. When the note is due, the face value is collected by 
the member bank and the amount forwarded to the federal 
reserve bank. In times of emergency commercial paper may, 
if necessary, be re-rediscounted between federal reserve banks 
and the entire gold reserves of the Federal Reserve Banking Sys- 


BANKING 177 

tern mobilized to sustain the credit of the banks considered as 
a unified group. 

Bank Clearings. The extensive use of checks in making pay¬ 
ments necessitates the development of a mechanism for easily 
and regularly routing checks to the bank on which they are 
drawn. If there is only one bank in a town and all the business 
men of the town have deposits in the bank, checks are cleared^' 
easily. A draws a check in favor of B. B deposits it in the bank. 
The total of deposits in the bank remains unchanged, but A^s 
deposit is reduced by the amount which the check calls for, and 
B’s deposit is augmented by the same amount. If there are 
two banks in the town, A may have a deposit in one bank and 
B in the other. B will deposit the check in his bank and his 
deposit will be increased by that amount. B’s bank now has an 
order calling for payment from A’s bank. A messenger may take 
the check to A’s bank and get cash for it. In actual practice, 
however, at the end of a day A’s bank would have several checks 
deposited calling for payment from the other bank; and B’s bank 
likewise would have several drawn upon A’s bank. These may 
nearly cancel so that little money need actually be transferred 
from one bank to another. Below is given a simple example of 
the operation of a clearing house in a town having four banks. 
The clearing house is merely a place where representatives of the 
different banks meet to exchange checks; it is not a profit¬ 
making institution. The four banks may be designated as 
A, B, C, and D. During a given day it may be assumed that: 

Checks are received by 


A 


B 


c 


D 

On B $1,000 

On A 

$1,200 

On A 

$1,400 

On A 

$1,500 

C 1,500 

C 

1,000 

B 

800 

B 

1,700 

D 2,000 

D 

1,500 

D 

1,200 

C 

1,300 

$4,500 


$3,700 


$3,400 


$4,500 

Checks on the 

bank below in 

other banks: 



A 


B 


c 


D 

$1,200 


$1,000 


$1,500 


$2,000 

1,400 


800 


1,000 


1,500 

1,500 


1,700 


1,300 


1,200 

$4,100 


$3,500 


$3,800 


$4,700 










178 


ECONOMICS 


In this case bank C owes the clearing house $400, and bank D 
owes $200, while bank A must be paid $400 and bank B, $200. 
With this exchange of cash all accounts between the banks are 
settled or cleared. In many cases settlement may be made 
only once a week. Perhaps tomorrow banks C and D might be 
the ones to receive payments. It will also be noticed that the 
total deposits in the four banks are unchanged by this process. 
Out-of-town checks are cleared through the federal reserve 
bank of the district. It will be remembered that each member 
bank keeps a deposit in the federal reserve bank of its district. 
Clearings between two federal reserve banks are settled by 
means of a fund deposited ty each of the twelve banks in 
the United States Treasury at Washington. 

Savings Banks. A savings bank is in reality not a bank. It 
is an agency for uniting and investing the savings of many 
persons. Interest is paid upon deposits which are left with the 
bank for a period of six months or more. These collected sav¬ 
ings are invested by the officials of the savings bank in high- 
grade securities bearing a somewhat higher rate of interest 
than is.paid to the depositors. In the East savings banks are 
as a rule mutual companies. The profits belong to the depositors. 
In other parts of the United States the savings bank is organ¬ 
ized as a corporation of the usual type and the profits go to the 
stockholders of the bank. Many commercial banks and trust 
companies have savings departments. 

The Trust Company. The trust company applies the de¬ 
partment store idea to financial institutions. The early trust 
companies were organized as insurance companies and as trus¬ 
tees for estates and individuals. Nearly all of the insurance 
business has been lost to the regular insurance companies, but 
the trust company has steadily developed in the field of bank¬ 
ing. Today a trust company acts as a commercial bank; it has 
an investment banking department; it acts as a trustee for es¬ 
tates, as guardian for minors and defectives, as a receiver, and 
in many other fiduciary capacities; it operates a savings bank; 
and it provides safe deposit vaults for securities and other 
valuable personal property. Nearly all of the larger banking 
institutions are actually, if not in name, trust companies. 


BANKING 


179 


Federal Land Banks. The commercial bank, interested in 
short-time loans, has not been able to help the farmer desiring 
long-time loans. In 1916 a federal act was passed providing for 
twelve Federal Land Banks in as many districts, to be super¬ 
vised by a Federal Farm Loan Board. The machinery was pro¬ 
vided for making long-time loans on farm mortgages at reason¬ 
able interest rates. In 1923 legislation was enacted making 
provision for loans to farmers for periods ranging from six 
months to three years. The Federal Reserve Bank Act was 
also amended so as to facihtate the making of loans to far¬ 
mers by national banks. These measures were intended to help 
the farmers in marketing their crops and live stock. 

Questions 

1. The bank is a manufactory of credit. Explain. 

2. Obtain a bank statement. Discuss. 

3. A bank may owe its depositors ten times the amount of cash in its 
reserves. Is it safe for a bank to do so? 

4. What are the chief advantages in the use of checks? 

5. What are the functions of a clearing house? 

References 

Day, J. P., Introdmtion to the Money and Banking System of the United 
States. 

Kemmerer, E. W., The AB C of the Federal Reserve System. 

Kniffin, W. H., The Business Man and His Bank. 

Moulton, H. G., Financial Organization of Society, 


CHAPTER XIX 


INVESTMENTS 

The Field of Investment. The field of investment has ex¬ 
panded enormously in recent years. The success of many en¬ 
terprises depends upon the sale from time to time of securities. 
A half century ago corporations were relatively few and small 
and their bonds and stocks were in the hands of a comparatively 
small group. Today the amount invested in bonds, mortgages, 
and corporation stocks is enormous and the number of investors 
is a host. Many a corporation today is owned by thousands of 
stockholders. With the encouraging increase in our per capita 
productivity comes the possibility of large savings, and, there¬ 
fore, large sums are now seeking safe investment opportunities 
and speculative openings as well. This may be an era of great 
spending, but it is also notable as one in which many are striving 
to obtain a competence through investment. Stock-market 
news often gets on the front page of the daily newspaper. It 
competes with the sporting page and the comics for the first 
place in the interest of the multitude. Investment banking 
houses now carry on active selling campaigns, and corporations 
sell stock to employees and to customers on the installment 
plan. 

The movement for wider distribution of investment securities 
began with the Liberty and Victory Bond campaigns of the 
Great War period. The increase in the number of persons in¬ 
terested in investment and in speculative issues has also its 
unfortunate side. It has been estimated that $500,000,000 is 
lost annually in worthless securities that are issued for fraudu¬ 
lent purposes. As much more is lost through ignorance leading 
to ill-advised projects. 

Investment and Speculation. Through savings and invest¬ 
ment industries obtain capital for buildings, equipment, and 
working capital. Savings and investment are essential factors 

180 


INVESTMENTS 


181 


in the growth of industry. Speculation is concerned with the 
rise and fall of the market prices of securities and commodities. 
To draw a sharp hne of demarcation between investment and 
speculation is impossible. No investment is absolutely stable 
and safe. In speculation the purchaser of financial securities 
is interested primarily in a rise in the market price of the secu¬ 
rities purchased rather than in the amount and certainty of in¬ 
come to be received. The speculator is looking to profits; the 
investor to steady income. The speculator may range over a 
wide field, but the investor is confined to a relatively narrow 
field of seasoned securities in stable industries with an excellent 
record of profitable business, and to certain governmental 
obligations. 

Bonds legally represent a creditor element. A specified rate of 
interest is paid and the principal is to be returned at a specified 
future date. The bondholder has a prior claim to the stock¬ 
holder, whether preferred or common. If the interest is not 
paid when due, the bondholders may resort to the courts and 
force the company into the hands of a receiver. The same may 
be done if the principal is not paid when due. When a receiver 
is appointed by the court, the stockholders temporarily or per¬ 
manently lose control of the business. There are many varieties 
of bonds issued by corporations. A mortgage bond has as its 
security a prior claim to certain specified properties of the cor¬ 
poration. A debenture bond is merely a claim to the income of 
the company. The owner of a debenture bond cannot lay claim 
to any specific piece of property, but he has priority of rights 
over stockholders. Stockholders have a claim upon the income 
of the company subsequent to bondholders. Stockholders can¬ 
not demand a receiver in case dividends are not paid. They 
are legally owners of the business and therefore residual claim¬ 
ants upon the income of the business. Dividends are paid only 
when the board of directors declares them. Certain commercial 
creditors who have furnished labor, materials, or stock have 
claims upon the current assets of the business prior to all claim¬ 
ants, including bondholders, but the holders of mortgage bonds 
ordinarily have first claim upon the property or the fixed capital 
In a growing and profitable business the common stockholders 


182 


ECONOMICS 


may receive considerable dividends and the earned surplus may 
also be increased. This adds to the equity of the stockholders 
in the business, but bondholders will continue to receive the 
same rate of interest and the principal of the bond will be un¬ 
changed. It will, however, tend to make the principal more 
secure. 

The Tests of the Good Investment. The yardsticks which 
may be used to measure the desirability of a particular security 
are many. The two of prime importance are security of principal 
and certainty of a reasonable income. No investment is abso¬ 
lutely safe in regard to these two items. A bond of the United 
States Government is probably the best investment which a 
person may make as far as security of principal and income are 
concerned, but the rate of interest will be low. Comparatively 
high rates of interest or return upon an investment are indica¬ 
tions that the security of income or principal may be called in 
question. In the case of corporation stocks there is no definite 
date for retirement as in the case of nearly all bonds; the investor 
can get his money only by selling out at the market price to some 
other investor. It is desirable that the security be readily 
marketable. Stocks and bonds listed on a large stock exchange 
can be sold much more readily as a rule than those which are not 
listed. The bonds and stocks of large corporations are usually 
readily marketable. Real estate mortgages and the securities of 
small businesses are not as readily sold. Security yield and 
marketability are important in the evaluating of a prospective 
investment. 

The investments of an individual should be diversified among 
different industries and localities. It is a serious mistake as a 
rule for the small investor “to put all of his eggs in one basket.’' 
A depression in one industry or locality will not seriously affect 
the market prices of the diversified holdings. Insurance com¬ 
panies, savings banks, and other institutional investors should 
also diversify their investments. If the purchasing power of 
money changes, the significance of the principal of a bond, of life 
insurance, or of a savings deposit may greatly change. In a 
period of fiuctuating price levels the owner of bonds may per¬ 
force become a speculator. If a safe bond for $1000 payable in 


INVESTMENTS 


183 


lawful money ten years later is purchased, for ten years interest 
will be paid regularly, and at the end of the period the $1000 will 
be returned to the investor. Suppose, however, that during the 
decade in question the price level for commodities has risen 20 
per cent. The purchasing power of the dollar will have fallen 
correspondingly. When the bond is due, it will take, according 
to this hypothesis, $1.20 to buy what $1.00 purchased when the 
investment was made. The actual value of the principal of the 
bond has been reduced. This would be true likewise of an in¬ 
vestment in life insurance or in a savings bank. The number of 
dollars promised would be returned, but the dollar would have 
depreciated in purchasing power. If prices are falling and the 
value of money appreciating, the reverse phenomenon takes 
place. The investor will gain in purchasing power of the princi¬ 
pal. His debtor will lose. The buyer of a gilt-edged’^ bond, the 
purchaser of life insurance, or the depositor in a savings bank 
may see the actual purchasing power of his principal and interest 
fluctuate while the number of dollars received is in exact accord 
with the terms of the original contract. Money income may re¬ 
main stable, but real income in the terms of necessities, comforts, 
and luxuries may fluctuate greatly. In a period of unstable 
monetary standards the owner of the stocks of certain well- 
established industries may actually be a speculator in a lesser 
degree than one who invests in sound bonds calling for payment 
in a fluctuating monetary unit. 

Investment Banking. An investment banking house markets 
securities. A corporation organized for the purpose of operating 
a railway or a steel fabricating plant is not well prepared to 
market its own securities. When a railway wishes to sell bonds 
for the purpose of securing funds to build another track or add 
to its terminal facilities, an investment banking house will care¬ 
fully investigate the proposition. If it is considered to be sound, 
the house, or a syndicate of investment firms, will buy the bonds. 
The railway will, therefore, be assured of the money. The 
investment bankers will endeavor to sell the bonds to their 
clients—individuals, insurance companies, savings banks, or 
other institutions having funds to invest. If the banking house 
cannot sell all of the bonds, it usually uses them as collateral at 


184 


ECONOMICS 


a commercial bank upon which to borrow a large fraction of the 
face value of the bonds. A high-grade investment banking house 
is careful to sell only excellent securities. It makes a profit by 
buying at from one to five or more points lower than the price 
at which the security is sold to its customers. For example, the 
investment bank may pay the railway $97 for every $100 bond, 
and in turn sell the bond at par. Insurance companies, savings 
banks, and institutions having large endowments are among 
the most important investors in good corporation and govern¬ 
ment securities. One large life insurance company has about 
40 per cent of its investments in government, railway, and 
public utility bonds, and practically the same amount in land 
mortgages. 

Investment Trusts. The investment trust is primarily a de¬ 
vice by means of which the investor may actually diversify his 
investment while buying directly only one type of security. In 
a sound investment trust the investor’s risk will be distributed 
by experts. In the United States the investment trust is of re¬ 
cent development. At least four forms or classes may be distin¬ 
guished: fixed, general management, specialized management, 
and financial holding companies. The success of all except 
the fixed trust depends largely upon management. In the 
fixed trusts a definite list of securities, usually of long-estab¬ 
lished and well-known companies, is selected. The investor in 
the securities issued by the fixed investment trust becomes a 
part owner of this list of securities. It is ordinarily difficult to 
change the list of securities as conditions change. No discretion 
is given to the managers. The interest and dividends received 
from the securities held in the portfolio of the trust are divided 
among the holders of the securities in turn issued by the in¬ 
vestment trust. 

In the general management trust the managers are given 
discretionary power to buy and sell securities as changing con¬ 
ditions may warrant. In the specialized management trust the 
managers are limited to certain kinds of securities in making 
selections. Some management trusts aim to increase their 
earnings through buying and selling securities and through the 
rehabilitation of certain corporations whose securities have been 


INVESTMENTS 


185 


purchased by the investment trust. The financial holding com¬ 
pany stands midway between the investment trust and the 
holding corporation. It frequently exercises a large element of 
control over the companies in which large blocks of securities 
are held. It is clear that the management form of investment 
trust may also do likewise. Investment trusts may retain a 
staff of management advisors. Indeed, the American invest¬ 
ment trust may become a controlling factor in many businesses. 
Scattered stockholders have little influence, but an investment 
trust may own and vote a large block of stock. Its representa¬ 
tives may attend stockholders’ meetings and exercise a control- 
Hng influence in the decisions as to business policies. 

Hints to Investors. One of the most authoritative textbooks 
on investment opens with the recommendation ^Hhat the in¬ 
vestor first and last seek the advice of an investment banking 
house.” The writer might with propriety have added, or of a 
reliable investment counselor, who has information as to in¬ 
vestment possibilities rather than stocks or bonds to sell.” The 
intelligent investor will study the balance sheets and income ac¬ 
counts of the corporations he is considering over a term of years 
covering a period of depression as well as of prosperity. The 
typical investor should not ‘‘put all of his eggs into one basket”; 
he cannot watch the basket carefully. He should practice diver¬ 
sification: (1) divide between seasoned stocks and bonds, (2) 
diversify with regard to types of industry—railways, public 
utilities, industrials, etc., (3) scatter as to geographical loca¬ 
tion. The business man and the young man may safely be ad¬ 
vised to put a small fraction of his funds into speculative ven¬ 
tures, but the man who has retired or who has passed middle 
age should avoid speculative issues. He cannot afford to take 
extraordinary chances of losing his principal. 

Each year millions of dollars are wasted on fraudulent and 
worthless securities. The reckless promoter and the unscrupu¬ 
lous salesman of securities take advantage of the very common 
itch to get rich quickly and without work. The glib seller of 
securities will point out that the Ford Motor Company and 
others have made fabulous sums. You are told that an oppor¬ 
tunity is being offered to get in “on the ground floor.” Pre- 


186 


ECONOMICS 


sumably you will reap large returns. Haste is usually emphasized 
in such cases. Avoid all plausible schemes of this type unless 
you have money to throw away. Another method of approach 
is through the mails. If your name gets on “the sucker list,” 
you will be bombarded with letters and circulars offering mar¬ 
velous opportunities to obtain unusual profits. The waste¬ 
basket is the proper receptacle for most of this literature. 
“Investment pitfalls” are a multitude. It is as difficult a task 
to invest your savings in good securities as it is to earn the 
money. 

The Stock Market. A stock exchange is fundamentally a 
market place for the purchase and sale of securities, chieffy the 
stocks and bonds of corporations. The New York Stock Ex¬ 
change is the most important stock market in the United States, 
but there are many others in the country. For five or six mil¬ 
lions of shares of stock to be bought and sold on the New York 
Stock Exchange in one day is no longer unusual. In addition 
there is a large sale of bonds. In the week of June 7 to 13, 1930, 
44,100 shares of the Missouri, Kansas, and Texas railway, 
39,300 shares of the Pennsylvania railway, 356,300 shares of 
the Consolidated Gas Company, 431,000 shares of International 
Nickel of Canada, 526,400 shares of the United States Steel 
Corporation, common stock, and 591,800 shares of Warner 
Brothers Pictures Corporation were sold on the New York Ex¬ 
change. The membership of a stock exchange is limited; only 
those having seats can buy or sell on the fioor of the exchange. 
In 1926 a seat on the New York Stock Exchange was sold for 
$185,000; since that date other seats have been disposed of at 
much higher prices. A purchaser must be satisfactory to the 
Committee on Admissions. 

Before the stocks or bonds of a given corporation can be sold 
on an exchange, they must be listed. While fisting does not 
guarantee that a security is not extremely speculative, it does 
eliminate issues which are fraudulent or illegal. Securities of 
an insolvent concern or of one which is not a substantial going 
concern will not be fisted on the New York Stock Exchange. 
The fisting committee requires much information of the corpora¬ 
tion whose stock is presented for fisting. 


INVESTMENTS 


IS7 


An individual who wishes to buy or sell listed stocks or bonds 
authorizes a broker to buy or sell a certain number of shares at 
market or at a particular price. If the broker has a seat on the 
exchange, he offers the stock directly on the exchange. If not, 
he does so through a broker who has a seat. A slight fee is 
charged for buying and selling securities. The broker merely 
acts as an agent. After the stock is sold, the certificate is en¬ 
dorsed by the owner, and it is sent to the transfer agent and 
the registrar of the corporation. These officials cancel the old 
certificate and issue a new one in the name of the purchaser. 
The price of the common stock of a corporation frequently 
fluctuates several points in a given day. Over a year the fluctua¬ 
tions may be extreme in the case of speculative stocks. 

The speculators in stocks do not as a rule buy the shares out¬ 
right. They buy on the “margin’’ or sell “short.Speculators 
who expect and desire stock prices to rise are called “bulls”; 
those who have sold short and who wish stock prices to fall are 
“bears.” Almost any daily newspaper will give the quotations 
of the opening, highest, lowest, and closing prices of the stock 
of a large number of railway and industrial corporations. Since 
the recent increase in the number of purchasers of corporation 
stock, stock market reports and financial news have become im¬ 
portant items in the daily grist of the newspaper. 

Questions 

1. Distinguish between investment and speculation. 

2. What is an ideal investment? Why? For every person? 

3. What are some “investment pitfalls”? 

4. What is the difference between an investment banking house and an 
investment counselor? 

References 

Jordan, D. F., Investments. 

Kirshman, J. E., Principles of Investment. 

Lagerquist, W. E., Investment Analysis. 

Lincoln, E. E., Testing before Investing. 

Taylor, A. W., Investment. 

1 For an explanation of these practices, see Dice, C. A., The Stock Market. 


CHAPTER XX 


TRANSPORTATION 

Transportation and Progress. The unusual and strange have 
a glamor about them that is fascinating to young and old, but, 
though much more important, we often neglect the common and 
familiar. The established methods of transportation and com¬ 
munication ranging from the animal and tribal trails up through 
a bewildering and interesting variety of paths and conveyances 
to the modern railway, the palatial ocean liner, and the tele¬ 
phone, telegraph, and radio systems of today are worthy of 
careful study by all interested in economic and social problems. 
In the United States people are so familiar with the modern 
means of communication that only in a time of stress and break¬ 
down is the public gaze directed toward the functioning and 
the importance of transportation and communication. The 
airship and the racing motor car attract more attention than 
the humble freight car, the tramp steamer, and the motor truck, 
but modern and ancient civilizations are built upon roads and 
transportation facilities. Tell the student of history or of social 
and economic problems about the means of communication of a 
people, and he will be able to describe the character of that 
people and determine the general outline of its economic and 
social institutions. The dark continents, places, and ages are 
characterized by poor roads, by isolation, and by crude means 
of transportation. 

Transportation is an important element in the development 
of nation- and world-wide markets, extensive trade, and large- 
scale specialized industry. Today, in direct contrast to ancient 
and medieval times, a considerable fraction of the world’s work 
consists in picking up materials and products, carrying them 
varying distances, in a bewildering variety of ways, and then 
putting them down in a new location. Transportation lines are 
indeed the arteries through which flow the lifeblood of the busi- 

188 


TRANSPORTATION 


189 


ness world. Cripple transportation facilities, and business 
is at a standstill while the inhabitants of this highly special¬ 
ized and interdependent world suffer. The large manufactur¬ 
ing center is dependent upon far-distant places for necessities, 
comforts, and luxuries. No place lives unto itself. 

The political and social effects of improved means of trans¬ 
portation and communication are also very significant. Effec¬ 
tive governmental control can only be extended so far as reason¬ 
ably good transportation facilities reach. The United States 
was able to extend from the Atlantic to the Pacific because its 
expansion came after the opening of the canal and railway era. 
Europe, with its discordant collection of small and independent 
sovereignties, developed during the ‘‘wagon-road'’ epoch. Na¬ 
tional prejudices nurtured through centuries are now difficult 
to overcome and inhibit and are potent forces opposing the 
growing pressure of economic internationalism. Modern people 
are literally united by lines of transportation and communica¬ 
tion. The local market of the ancient and medieval world has 
been in no small measure displaced by national and world mar¬ 
kets. The price of wheat and cotton is determined by world 
supply and world demand. Chicago beef is sold in the Orient, 
and American locomotives are used on Japanese railways. At 
the heart of this vast business maze may be discerned the trans¬ 
portation system. Regular, safe, and rapid transportation and 
communication are basic elements in the modern business and 
political world. Interstate and international trade, minute 
division of labor, world markets, giant business corporations, 
great national states, the daily newspaper—all are the fruitage 
of the railway, the steamship, the telegraph, the telephone, the 
cable, and the radio. The idea of a world League of Nations 
could not emerge into clear relief until after the continents had 
been moored together and until the size of the globe had been 
greatly reduced when measured in transportation time. Isola¬ 
tion, political and social as well as industrial, is now almost a 
matter of historical significance only. Outside the region im¬ 
mediately surrounding the North Pole and the South Pole, the 
merchant and the transporter are almost omnipresent. 

The history of America in may respects traces within the com- 


190 


ECONOMICS 


pass of a few centuries the general outlines of the course of world 
history. In studying the history of transportation, the student 
is able to discern the same general trend of affairs in the United 
States as in the Old World. The earlier trails in the American 
wilderness were those made by animals. The buffalo was a 
great trail maker. The American Indian often used the buffalo 
trail, and later white explorers, military expeditions, and sur¬ 
veyors found the long trails made according to the instinctive 
promptings of the buffalo the best routes into the interior of 
the great continent. In this way was ‘‘blazed the way for the 
railways to the Pacific. As the frontier stage began to pass, 
trails were gradually replaced by bad roads, and later bad roads 
by better ones, and the waterways commenced to serve as com¬ 
mercial highways. 

The “turnpike’^ road period began in 1790. These roads 
were marked improvements over the early roads cared for, or 
neglected, by the local governmental units. In spite of the 
high tolls charged on the turnpikes, the cost of transportation 
was reduced. The original turnpikes were built by private 
companies; state aid was given in some cases. The famous 
Cumberland road was built by the federal government. In bad 
weather a stagecoach journey was slow, difficult, and even dan¬ 
gerous. Before the War of the Revolution to go from Boston to 
New York City by stagecoach, a distance of two hundred and 
thirty miles, required a week. At the opening of the nineteenth 
century it consumed five and one-half days to go from Phila¬ 
delphia to Pittsburgh, a distance of three hundred and ten 
miles. Road freighters made slower time. 

The changes in the Middle West, as the trail was replaced by 
the wagon road and the pack-horse by the stagecoach and the 
freighter, were fraught with important social and economic con¬ 
sequences. The development of the new method of transporta¬ 
tion by stagecoach and freight wagon was vigorously opposed 
by the pack-horse men. “ Strong-armmethods were occasion¬ 
ally resorted to. Coaches were attacked and overturned, 
harnesses were cut, and passengers and drivers harshly treated. 
“The pack-horsemen argued that the mail could not be carried 
so rapidly in coaches; that the introduction of the stage- 



TRANSPORTATION 


191 


coach would throw hundreds out of employment; that the 
American horse was not strong enough to draw the heavy coach 
and wagon loads/’ Inevitably, however, the new and more 
effective method won the fight and held the center of the 
stage until displaced by the canal, the steamboat, and the 
railway. 

The stagecoach era was an interesting epoch in the history 
of the Middle West. The Cumberland Road probably presented 
its highest and best type. Over this great national highway 
moved the covered wagon of the westward moving pioneer, the 
stagecoach, the freight wagon, herds of cattle, and flocks of 
sheep. Along the route at intervals were the taverns and 
wagon-houses. Coach lines competed with one another for 
passengers and freight. Rate wars like those of early railway 
days occurred from time to time. The coaches were long awk¬ 
ward affairs. Ordinarily there were three seats inside, each 
seating three persons. One additional passenger could sit out¬ 
side with the driver. The road freighter was a huge wagon with 
wheels having broad rims or tires. The top was usually covered 
with canvas. The teamsters driving the freighters ‘'put up” 
at inns called wagon-houses where cheaper accommodations 
were provided than at the taverns. Many picturesque taverns 
dotted the roadside. With the coming of the railway the stage¬ 
coach and the tavern were quickly displaced, but the advent 
of the automobile and the building of improved national high¬ 
ways are bringing into being a new era in road life. An era of 
canal building followed the opening of the Erie Canal in 1825. 
This canal connected Buffalo and the Great Lakes with Albany, 
New York City, and the Atlantic Ocean. The railway, however, 
soon put an end to the craze for building canals. 

Growth and Importance of the American Railway Industry. 
The first American railways were short, independent lines. The 
gauge of different roads varied considerably. Until a standard 
gauge was adopted, it was impossible for cars to be transferred 
from one line to another. The first railways were expected to 
act as feeders for canals; it was not anticipated that the canals 
would soon be in a secondary position. The pioneer American 
railway was the Baltimore and Ohio which has recently cele- 


192 


ECONOMICS 


brated its centenary. Construction work began in 1828; by 
1830 thirteen miles was completed. Previous to consolidation 
in 1853 there were ten or eleven independent lines of railway 
between Albany and Buffalo. The early railways met with much 
opposition, as does nearly every innovation which threatens the 
“good old ways.” It was asserted that many physical evils 
would follow from traveling at the excessively rapid rate of 
thirty miles per hour. The tavern keepers on the turnpike 
roads, the turnpike companies, the owners of stage lines, and 
wagoners who hauled over the roads were all bitterly opposed 
to the railway. However, in spite of opposition railways de¬ 
veloped rapidly. 

In 1860 the total railway mileage was over 30,000. In 1869 
the first transcontinental line was completed. In the twenty- 
year period from 1860 to 1880 the railway mileage in the United 
States was multiplied three times. In 1910 it was approximately 
240,000, and the railway network was practically complete. 
At present the total railway mileage is about 260,000. This 
is greater than the mileage of all European railways and is 
approximately one-third of the total world mileage. The valua¬ 
tion of the American railways is approximately $20,000,000,000. 
It is estimated that the railways employ at least one out of 
every fifty-two persons in this country. 

Rate-Making Problems. Rate making is the heart of the 
railway problem. The railways are public utilities; they are 
clearly affected with public interest. Competition does not 
operate effectively in the case of public utilities to determine 
the quality and price of the service rendered. The railway is 
essentially monopolistic; it is now generally accepted that organ¬ 
ized society must either regulate or own and operate the rail¬ 
ways. The reasons for this attitude toward railways grow out 
of the peculiar conditions under which the railway operates. 
Competition between unregulated railways becomes cut-throat 
and presently leads to pooling or to some other more definite 
and permanent form of combination. A railway manager in 
competition with other roads is under peculiar temptations 
to reach out and take traffic from his competitors. In the 
early days of American railroading such competition often 


TRANSPORTATION 


193 


resulted in personal, place, and commodity discriminations as 
to rates. 

The largest portion of the income of a railway is derived from 
freight traffic. Passenger, express, and mail service are minor 
matters from the point of view of income. In order to do busi¬ 
ness, a railway must first spend large sums of money. A right 
of way must be bought, tracks must be laid, terminals and 
depots provided, switches and signaling devices are required, 
and expensive rolling stock is necessary. The railway usually 
obtains much of its funds for such purposes by selling bonds. 
The interest on the bonds and the taxes paid to various govern¬ 
mental units become fixed charges. Many of the expenses of a 
railway are constant; that is, not changed by slight modifica¬ 
tions in the amount of traffic hauled. These expenses are prac¬ 
tically constant whether a train is composed of well-laden or 
empty cars, or whether ten or nine trains are operated in a 
given period of time. 

According to the bookkeeping prescribed by the Interstate 
Commerce Commission, railway expenses may be classified as 
follows: 

Fixed charges 

Operating expenses 

(a) Maintenance of ways and structures 

(b) Maintenance of equipment 

(c) Conducting transportation 

(d) General expenses 

Professor W. Z. Ripley divides this grouping of expenses into 
constant and variable expenses in the following fashion: 


PEK CENT OF OPERATING 
EXPENSES 


Both Constant Variable 


Maintenance of ways and structures 
Maintenance of equipment 
Conducting transportation 
General expenses 
Fixed charges 


15 10 5 

15 7.5 7.5 

40 20 20 

3 3 


27 27 


100 67.5 


32.5 


194 


ECONOMICS 


According to this estimate about two-thirds of the total operat¬ 
ing expenses of American railways may be called constant— 
not affected by slight changes in the amount of traffic. The 
table below shows that about 55 per cent of the direct expenses 
of operation (fixed charges omitted) are constant. ^ 

PER CENT OP OPERATING 
EXPENSES 

Both Constant Variable 


Maintenance of ways and structures 

20 

13.4 

6.6 

Maintenance of equipment 

20 

10 

10 

Conducting transportation 

56 

28 

28 

General expenses 

4 

100 

4 

55.4 

44.6 


A business of high fixed expenses is in constant danger of being 
seriously affected by a decline in demand for the article furnished 
or the service rendered. The following example of a railway 
with high fixed charges will show the instability of profits avail¬ 
able for dividends. It will be assumed that the road has capital 
stock equal to $100,000,000. 


Gross revenue $100,000,000 

Expenses 

Operating expenses 66,000,000 

Fixed charges 28,000,000 


Total $94,000,000 

Profits (available for dividends) $6,000,000 


Let it be assumed that there is an increase of 10 per cent in the 
gross revenue, and that 50 per cent instead of 55.4 per cent 
of the operating expenses remain constant. 


Gross revenue 
Operating expenses 

($66,000,000+50% of 10% of $66,000,000) 
Fixed charges 


$ 110 , 000,000 

69,300,000 

28,000,000 


Total $97,300,000 

Profits $12,700,000 

1 Other authorities hold that Ripley’s percentages for constant costs are 
too high. 




TRANSPORTATION 


195 


Again, assume a decline of 10 per cent in gross revenues. 


Gross revenues 
Operating expenses 

($66,000,000-50% of 10% of $66,000,000) 
Fixed charges 


$90,000,000 

62,700,000 

28,000,000 


Total 

Deficit 


$90,700,000 

$700,000 


An increase of 10 per cent in the gross revenue doubled the 
profits, while a decrease of 10 per cent changed a profit of 
$6,000,000 into a deficit. This example indicates an undesirable 
feature of a high bonded debt in the case of a railway. 

Classification. A railway hauls a bewildering variety of prod¬ 
ucts varying distances and under different conditions—coal, 
lumber, silk goods, cotton textiles, machinery, iron ore, etc. A 
considerable portion of railway service is actually furnished at 
joint cost with the same facilities. Railway companies can 
ascertain their total expenses without baffling difflculties, but 
the exact assignment of costs to specific services is difficult. 
What is the cost of carrying a passenger one mile? How much 
does it cost to carry a ton of coal or a ton of silk one mile? It 
should not be overlooked that the same roadbed and other 
common facilities are used in each case. In the early days of 
railroading, while roads were seeking more traffic, low rates per 
ton-mile would frequently be given to certain commodities. 
If such low rates were not offered, the goods would not be trans¬ 
ported excepting for short hauls. If a railway were built and 
had trains running, the addition of a few cars to an otherwise 
short freight train would mean slight additional expense. The 
roadbed and depots were there and the train was going anyway. 
Railway traffic managers felt that whatever rate this kind of 
traffic would bear over the added expense was clear gain. As a 
consequence a variety of ton-mile rates were allowed for the 
commodities hauled. Some valuable articles were made to pay 
the added expense of hauling plus more than their share of the 
constant expenses. On the other hand, certain commodities, 
such as coal or iron ore, paid ordinarily little more than the 
variable or added costs due to their haulage. Discrimination 



196 


ECONOMICS 


between commodities is now called classification and is allowed 
and regulated by the Interstate Commerce Commission. 

In passenger service classification is also present. First-class 
rates apply to the great bulk of travelers. The Pullman and 
excess-fare trains, however, reach a class of people whose pocket- 
books are fatter than those of the average American. Excursion 
and immigrant trains and other special low-fare services are 
intended to reach a group who would not ordinarily travel at 
the first-class rates. The extra cost of running an excursion 
train is not excessive. If the train can be loaded with persons 
who would not have made the trip at ordinary rates, any excess 
from fares over the extra expenses of the train will be clear 
gain and hkewise may be applied toward paying a portion of 
the fixed expenses of the road. Under such circumstances pas¬ 
sengers paying the regular rates do not seem to have valid 
reasons for objecting to low rates for excursions. 

Personal Discrimination. As has been suggested, the railway 
is a business of high fixed expenses. Within certain limits an 
increase in the amount of traffic will allow this overhead expense 
to be spread over a larger number of traffic units. The traffic 
manager of an unregulated railway is subjected to temptations 
which do not greatly affect the manager of a grocery store. The 
latter has a relatively low fixed expense or overhead cost. To 
the railway manager additional freight or more passengers 
spell larger profits because more income is received with little 
additional total operating expenses. In the early days of rail¬ 
roading, before governmental regulation became reasonably 
effective, the railway officials offered special favors to large 
shippers who would send freight over their road instead of over 
a competing line. This policy in turn would cause the second 
road to make an effort to recover the lost traffic. This practice, 
which was known as “rebating,” may be called “personal dis¬ 
crimination. ” Sometimes large shippers took the initiative and 
threatened to send their shipments over another road unless 
given substantial rebates. Personal discrimination is illegal 
under the laws now regulating American railway transportation. 

Place Discrimination. Another form of discrimination also 
appeared early in the history of railway transportation. It is 


TRANSPORTATION 


197 


called “place discrimination'’ and consists in giving more favor¬ 
able rates to one city or district than to another. Place discrim¬ 
ination is also a direct consequence of high fixed expenses. 
Consider the case of two cities, A and B, one thousand miles 
apart, connected by a direct railway line. Assume also that 
these two cities have the option of sending goods by a water 
route. A third town, C, is located midway between A and B, 
but it is not on a water route nor is it served by another railway. 
Because of water competition certain kinds of freight may be 
carried from A to B by rail for less than from A to C, one-half 
the distance and on the railway line. Low through rates must be 
offered or little freight will be carried from A to B. If little 
through freight be carried, the road will not be utilized effec¬ 
tively. The traffic density, or the amount of freight carried per 
mile of line, may be low. The extra expenses of carrying con¬ 
siderable additional through traffic will not be great. If the 
through freight can be made to pay more than the extra expenses 
involved, it will help to reduce the amount of fixed charges 
which must be spread over the remaining traffic. On the other 
hand, if all freight, local as well as through, were charged the 
same low distance rates, the fixed charges could not be paid. 
Under the present law regulating American railways, charging 
less for a long haul than for a short haul over the same line is 
forbidden, but a certain amount of place discrimination is 
allowed by the Interstate Commerce Commission. Cities and 
districts which have the advantages of water or rail competition 
are usually given somewhat more favorable rates than those less 
fortunately situated. In the absence of rate regulation, railway 
traffic managers have the power to build up or destroy a city or 
a corporation through the power to lower or raise freight rates. 
Slight discriminations in rates may spell business success or 
failure. 

Basic freight rates are of two kinds: distance and uniform or 
postage-stamp rates. Actual rates charged are compromises and 
partake as a rule in some degree of the characteristics of both 
types. The general adoption of distance rates would cause a 
different distribution of industry and of population from that 
which would result as a consequence of the widespread use of 


198 


ECONOMICS 


uniform rates. The application of distance rates would tend to 
reduce or to eliminate the long-distance hauling of cheap and 
bulky commodities. Manufacturing would spring up wherever 
power and raw materials were readily obtainable. Unless its 
advantages in the production of a given article were very 
marked, no particular district could profitably ship its products 
long distances to compete with the output of a district near to 
the markets under consideration. On the other hand, if the 
postage-stamp system of rate making were generally used, 
Cleveland could ship its products to a Colorado town as cheaply 
as could Denver. Under such circumstances a section of the 
country adapted to the production of a special product would 
tend to concentrate its efforts upon this commodity. It would 
be able to compete successfully in distant markets with pro¬ 
ducers located only a few score of miles from these markets. 
Postage-stamp rates would cause excessive territorial division 
of labor, and such rates would lead to an indefinite amount of 
unnecessary transportation. Theoretically, a fair rate is based 
upon mileage, or a distance rate modified to meet the exigencies 
of competition from ocean, lake, river, or canal carriers. 

Regulation. Governmental regulation of certain industries 
especially vital to the public is not confined to recent decades. 
Inns, cab drivers, toll roads, and bridges have for many genera¬ 
tions been subjected to special regulations. Market places and 
itinerant traders have also been controlled by governmental 
edicts. Roads, bridges, canals, and finally railways and other 
recent methods of transportation and communication have been 
recognized as semi-public instrumentalities. Certain rights of 
eminent domain are granted. These utilities are held to be 
appropriate subjects for a higher degree of governmental con¬ 
trol than ordinary business in manufacture, mining, farming, or 
merchandising. 

Under the Federal Constitution the regulation of interstate 
commerce is vested in the federal government, while within-the- 
state business is left to the state concerned. Since nearly all 
railways engage in interstate commerce, practically all regula¬ 
tory measures in regard to railways are now federal. Indeed, 
the Interstate Commerce Commission can in actual practice 


TRANSPORTATION 


199 


regulate intra-state rates. The making of transportation rates 
and the regulation of railways is a function of the legislative arm 
of government, but that power may be delegated to a commis¬ 
sion. The courts, however, have the power to review upon com¬ 
plaint the orders of the Interstate Commerce Commission. This 
power is derived from a clause in the Federal Constitution 
which provides that a person may not be deprived of property 
^without due process of law.” To fix rates excessively low, 
for example, would practically destroy the value of the prop¬ 
erty of a railway and would result in virtual confiscation of 
property. 

The first general federal law regulating railways was passed 
in 1887. It established the regulatory body called the Interstate 
Commerce Commission. This law has been modified and 
strengthened several times. The last general act was that of 
1920. The Commission has the power to prescribe rates which 
are fair and not discriminatory. It is also given the authority 
to determine the classification of freight. A uniform system of 
bookkeeping is required of the railways. A railway corporation 
may not issue new securities without the approval of the Inter¬ 
state Commerce Commission. The Commission has been en¬ 
gaged for several years in making a valuation of the physical 
assets of the railways. The Commission also possesses many 
important powers in regard to the control of the services and 
facilities of the railways. The act of 1920 included a “recapture ” 
clause. If the net operating income of the railway exceeds 
6 per cent of the valuation of the property utilized by the rail¬ 
way, one-half of the excess shall be paid into a contingent fund 
to be used by the government in making loans to roads needing 
funds. 

It has been well said that the right to private property is in 
reality a bundle of rights. In businesses affected with public 
interest, especially in the case of railways and public utilities, 
regulation has gone far. The bundle of rights connected with 
private ownership has been reduced to a small size. The owners 
of our railways cannot fix rates or determine the classification 
of freight; they are obliged to install various safety appliances 
and furnish certain facilities upon the order of a governmental 


200 


ECONOMICS 


commission; they may not build a new line or cease operating 
an old one without special permission; they may have a portion 
of their net profits ‘‘recaptured^’ or taken from them; they can¬ 
not issue new securities until the Interstate Commerce Commis¬ 
sion grants permission; and the books of a railway company 
must be kept in accord with the standards prescribed by the 
Commission. 

Water Transportation. There are four classes, or kinds, of 
waterways which serve the American people: oceans, the Great 
Lakes, rivers, and canals. Inland lakes and rivers provided 
early trade routes. The canal, the railway, and the hard-surfaced 
road are, with few exceptions as to canals and highways, of com¬ 
paratively recent origin. The volume of water-borne commerce 
of the United States in 1925 was about 483,000,000 tons. Of 
this total less than 100,000,000 tons were carried in overseas 
trade. Our coastwise and inland water traffic is nearly four 
times that of our overseas foreign trade. The Great Lakes, 
rivers, and canals carry a considerable volume of traffic. The 
rates by water are usually low and certain commodities, such 
as coal, iron ore, lumber, and wheat, may be carried by the 
relatively slower water transportation in competition with the 
railways. Nearly all of the earlier inland canals have fallen 
into disuse. The Erie Canal, originally completed in 1825, was 
enlarged during the opening years of the present century, but 
the traffic has not been as great as anticipated. There are at 
present two important inland waterway projects under con¬ 
sideration ; the Lakes-to-the-Gulf scheme to connect Lake Mich¬ 
igan with the Gulf of Mexico utilizing the Mississippi River 
and a canal across Illinois, and the Great Lakes-Saint Law¬ 
rence River project to connect the Great Lakes and the Atlantic 
by means of a ship canal. These projects would cost large sums, 
and the Great Lakes are icebound for about 25 per cent of the 
year. 

The Automobile and Hard-surfaced Roads. The rise of the 
automobile to a position of major import in the field of trans¬ 
portation has been spectacular. In 1895 four passenger cars 
were registered in the United States. The opening year (1901) 
of the twentieth century recorded a registration of only 14,800. 


TRANSPORTATION 


201 


The motor truck made its appearance in 1904. The table below 
indicates the rocketlike upsweep of the automotive industry. ^ 



REGISTRATION OP 

REGISTRATION OP 


PASSENGER CARS 

MOTOR TRUCKS 

Years 

Number 

Number 

1905 

77,400 

600 

1910 

458,500 

10,000 

1915 

2,309,666 

136,000 

1920 

8,225,859 

1,006,082 

1925 

17,512,638 

2,441,709 

1929 

23,121,589 

3,379,854 

1930 

23,200,000 

3,518,000 


In 1929 the number of persons employed directly or indirectly 
in the motor vehicle manufacturing business was estimated to 
be 4,700,000. The drivers of automobiles have insistently de¬ 
manded better and better roads. In 1904 the “rural road 
mileage’^ of the United States was 2,151,379, of which 153,530 
miles were “surfaced.^’ In 1929 the rural road mileage was 
3,016,281, of which 660,000 miles, or over one-fifth of the total, 
were surfaced. In the quarter of a century from 1904 to 1929 
over 500,000 miles of rural roads were surfaced. In addition 
marked progress was made in paving city streets. 

Transportation by Air. It is not difficult to become optimistic 
about new methods of transportation. Extravagant prophecies 
are being made in the field of aeronautics. However, spectacu¬ 
lar progress has been achieved during the last few years in air 
transportation. Approximately 8,000,000 pounds of air mail 
were carried in 1930 and about 400,000 passengers were carried 
in the commercial air service. The railways may soon be forced 
to meet a new competitor; air transportation is winning a place 
in the transportation industry. Fog must be overcome before 
air transportation can become regular and safe along the Great 
Lakes and in many parts of the country bordering on an ocean. 

Future of Railway Transportation. As specialization and com¬ 
plexity grow in industry, transportation becomes a larger and 
larger factor in business life. The success of “hand-to-mouth’^ 

^ Facts and Figures of the Automobile Industry, 1930. Issued by the 
National Automobile Chamber of Commerce. 


202 


ECONOMICS 


buying with its reduction of inventories to a minimum depends 
upon the speed and certainty of transportation operations. 
Delays and tie-ups in transportation are costly and dangerous. 
It is essential that the shortest possible routes be chosen and 
that the rapidity of freight movement be increased. Goods 
in transit or in storage add to the overhead expenses of busi¬ 
ness. Airplanes, truck and bus transportation may stimulate 
the railways to improve their service beyond the present level. 
Door-to-door freight service may be the next step. It would 
reduce terminal expenses and tend to speed up the movement 
of freight. Mankind has frequently adopted new means of 
accomplishing things, but the old instrumentalities are only 
slowly discarded or are not displaced. The automobile in its 
various forms has evolved rapidly, but it bids fair to supple¬ 
ment rather than to displace the railway. Freight traffic con¬ 
tinues to increase, although passenger traffic by rail has declined 
somewhat. Indeed, the automotive industry has contributed 
in a considerable degree to the freight traffic of American rail¬ 
ways—gasoline, oil, grease, tires, accessories, steel, lumber, and 
so on through a long list. 

Mr. Leonard Ayres presents statistics showing that from 
1906 to 1920 national production and railway freight fluctuated 
together. An increase or decrease in national production was 
accompanied by a corresponding increase or decrease in railway 
freight tonnage. Since 1920 national production has increased 
at a more rapid pace than railway freight tonnage. “ The motor 
truck is cutting into the railway freight business just as surely, 
although not as seriously, as the motor car is diminishing the 
railway passenger business. In both cases it is the short-haul 
business that is most seriously affected, and in both cases the 
results are progressive in nature.” ^ 

American railways have greatly increased in recent years 
both in the average train load and the average length of a freight 
train. Grades have been reduced, many curves eliminated, 
heavier rails have been laid, and the fuel consumption per 
unit reduced. Using a composite index of thirteen factors. 
Dr. Parmelee, of the Bureau of Railway Economics, has cal- 

1 The Cleveland Trust Company Business Bulletin, May 15, 1930. 


TRANSPORTATION 


203 


culated the rising scale of railway operating efficiency as follows: 
1920 to 1924, 100; 1924, 104.8; 1925, 109.4; 1926, 113.5; and 
1927, 115.2.^ According to this method of calculating, the 
efficiency of railway operations in 1927 was over 15 per cent 
higher than the average for the years 1920 to 1924—a note¬ 
worthy performance. 

Questions 

1. If a railway has its roadbed and equipment and its trains running, 
what added cost would be incurred if it hauled one additional freight 
car from Cleveland to Chicago? 

2. Would it be good business policy for a railway to haul such a car at 
a rate but little in excess of this added cost, provided it could get no 
more for the service? 

3. Would it be good business policy to haul all traffic at such rates? 

References 

Curtis, R. E., Economics; Principles and Interpretation, Ch. 24. 
Johnson, E. R., Huebner, G. G., and Wilson, G. L., Principles of 
Transportation. 

Recent Economic Changes, Vol. I, Ch. 4. 

Rufener, L. a.. Principles of Economics, Ch. 18. 

1 Recent Economic Changes, Vol. I, p. 291. 


CHAPTER XXI 


PUBLIC UTILITIES 

What Are Public Utilities? In a narrow sense public utilities 
may be restricted to industries providing for cities and towns 
water, gas, electricity, telephone service, and street railway 
transportation. The steam railway is a special form of pubhc 
utility. From this point of view a public utility is an industry 
producing under conditions of monopoly a service which is al¬ 
most indispensable to the public; a public utility is granted by 
governmental authority the right to use the pubhc streets or 
to exercise the power of eminent domain. Its services are of a 
public nature—affected with public interest—and are not pro¬ 
duced under competitive conditions such as are obtained quite 
generally in manufacture, farming, mining, and retaihng. It is 
quite clear that one water, gas, or street railway company can 
supply the needs of the people in one city or section of a city 
better and more economically than can two or three water, 
gas, or street railway companies. A public utility is a business 
of high fixed expenses and is generally operated under conditions 
of diminishing cost of operation as the volume of the business 
increases. The telephone seems to be an exception in regard 
to diminishing cost. The function of a pubfic utility must be 
performed by governmental agencies or by private agencies 
authorized by, acting for, and regulated by, public authority. 

In short, a public utility is not a purely private business. As 
in the case of the railways, municipal public utihties are clearly 
affected with public interest and stand in a peculiarly close re¬ 
lation to governmental agencies. Indeed, a public utifity may 
logically and legally be considered as performing a function of 
the state. The pubhc grants it certain privileges in regard to 
the use of streets or strips of land, it is recognized as monopolis¬ 
tic in character, the community is directly dependent upon its 
efficient and continuous functioning, and its private managers 

204 


PUBLIC UTILITIES 


205 


and owners are expected to make only a reasonable return upon 
the investment. The rapid urbanization of the American people 
has made the operation and the control of pubhc utihties mat¬ 
ters of great public concern. 

Growth of Public Utilities in the United States. As manufac¬ 
turing towns and cities developed and the urbanization of our 
population began, the need for an organized form of service to 
furnish water, light, transportation, and communication emerged. 
The first American water plant was established in Boston in 
1652. In the city and town of today comfort, health, cleanliness, 
fire protection, and recreation require an adequate supply of 
water. Because the water is used for fire protection as well as 
for domestic purposes, because the purity of the water supply 
is essential to health, and because the furnishing of water is 
relatively simple, a large percentage of American water plants 
are owned and operated by the local governmental units. New 
York City and Los Angeles bring water from distant points 
through aqueducts. In the latter case the aqueduct is approxi¬ 
mately 240 miles in length. 

Gas was originally used for lighting, but today it has been 
almost entirely superseded by electricity in that field. The first 
American gas company was granted a charter by the City of 
Baltimore in 1816. The early plants for lighting the streets in 
cities and towns met with much opposition. The escape of gas 
fumes was feared. To turn darkness into daylight by means of 
street light was contrary to the plan of the world, and, there¬ 
fore, sacrilegious. It was also urged that thieves would be en¬ 
couraged. Because of this opposition, it was for many years 
exceedingly difficult to obtain the capital necessary to build 
gas plants. With the introduction of electric lighting gas light¬ 
ing declined rapidly, but the gas industry expanded through 
the increased use of gas for the kitchen stove, for heating, and 
as an industrial fuel. The industrial use of gas gives promise of 
great expansion in the not distant future. Gas may be manufac^ 
tured at the mouth of bituminous coal mines and passed long 
distances to industrial cities and towns. 

The electric light and power industry has grown rapidly and 
constantly until it is now ‘^a giant among the giants.” From 


206 


ECONOMICS 


1909 to 1927 the private electric light and power industry showed 
an increase of 300 per cent in the number of persons employed. 
The foundations upon which the central stations furnishing 
hght and power were built reached back to the pioneer dis¬ 
coveries of such scientists as Faraday, Henry, and Davy in the 
early part of last century. The arc Hght was first made commer¬ 
cially feasible by Brush in the seventies. The incandescent 
light in parallel circuit and the first central stations were de¬ 
veloped commercially between 1877 and 1882 by Edison. How¬ 
ever, many other scientists and inventors played important 
roles in the early history of the electric light and power indus¬ 
tries. In 1902 this business had an investment of less than 
$650,000,000; in 1922, $4,500,000,000; and in 1928, of approxi¬ 
mately $9,500,000,000. The output and the size of the generat¬ 
ing units had likewise grown with amazing rapidity. Trans¬ 
mission systems are being developed which extend across state 
lines. The country is in the process of being crisscrossed with 
high-tension lines, furnishing light and power to industrial 
plants, for household purposes, for street light, and other pur¬ 
poses. Steam generating units and hydroelectric plants are 
being united into gigantic systems, and the small isolated gen¬ 
erating units are being displaced. The next decade or two will 
probably see much further expansion. Increased use of the elec¬ 
tricity in industrial plants, on farms, in our homes, and for 
street lighting and advertising purposes may reasonably be an¬ 
ticipated, and progress is being made in electrifying the steam 
railways. 

The possibilities in the further development of a great net¬ 
work of high-pressure electric wires seem enormous. Giant 
Power” and “Super-Power” are terms frequently used to de¬ 
scribe the future magnitude of the light and power industry. 
In the words of Robert W. Bruere, “the immediate objective 
of Giant Power is the conversion of all our primary energy re¬ 
sources into electricity and their pooling into regional systems 
which will then be integrated into a nation-wide federation of 
systems.” The realization of such a program may lead to a 
breakdown of the high degree of centralization of industry 
forced by steam power. The super-power system may bring 


PUBLIC UTILITIES 


207 


electricity ^‘to every man’s door in any desired quantity, of 
standard quality, and at prices substantially uniform for each 
class of service.” This power would come from a common res¬ 
ervoir constantly fed by steam and water plants. 

The first street-car track was laid in New York City in 1831. 
Horse-drawn cars were used. The first electric railway system 
of practical significance is attributed to Sprague who installed 
it in Richmond, Virginia, in 1888. However, the first practical 
electric line in America is claimed for Cleveland in 1884. Kansas 
City, also, in 1884 developed a system using probably for the 
first time the trolley. In recent years the street railway has 
faced extraordinary competition in the private automobile, 
the bus, and the taxicab. It is possible that the increasing 
traffic congestion in our cities, together with the traffic prob¬ 
lems which have arisen, may react favorably for the street rail¬ 
way. The electric interurban railway, which flourished in the 
opening decade of the century, has in recent years suffered 
greatly. Many lines have been abandoned. 

In March, 1876, Alexander Graham Bell successfully trans¬ 
mitted the human voice over a wire. From that successful 
experiment of a httle over a half century ago has arisen the 
far-flung telephone industry which literally ties all parts of the 
nation together. With few exceptions it is now possible for a 
person in any part of the United States to get into telephonic 
conversation with another person at any time and anywhere 
within the borders of the nation. In 1928 the Bell system esti¬ 
mated that 24,000 million calls were originated by its customers. 
In 1930 there were approximately 20 million telephones in 
the United States of which about three-fourths were directly 
controlled by the Bell companies. The American Telephone 
and Telegraph Company controls the various Bell companies 
and the Western Electric Company. The stockholders of the 
corporation numbered approximately 550,000 in 1931. “There 
are now (January, 1930) approximately 10,000 engineers en¬ 
gaged in the work of the Bell system of which approximately 
6,300 are in the operating companies, 2,200 in the headquarters 
departments, and 1,500 in the Western Electric Company.” ^ 

^ The Bell System Technical Journal, January, 1930, p. 7. 


208 


ECONOMICS 


Valuation and Rates. In ordinary private business the owners 
and managers are expected to gain or lose because of manage¬ 
ment methods, the vicissitudes of business, fluctuations in price 
levels, and the flke. The owners and managers in a competitive 
business are allowed to absorb such gains and are required to 
accept such losses as may come in the uncertainties of business. 
Are the investors and the management in public utilities and 
railways to be placed in the same class? Competition plays a 
small role in these industries and they are performing a service 
clearly affected with public interest. The legal and economic 
theory which is generally accepted is that the owners be allowed 
a fair rate upon the actual investment and be protected in a 
large measure from the ordinary vicissitudes, speculative op¬ 
portunities, and dangers of ordinary business. On the other 
hand, public utilities should not be allowed to gain monopoly 
profits. In a competitive business, the value of the investment 
is in a large measure price-determined, but in one in which prices 
are regulated by governmental fiat and in which it is assumed 
that an investor should be allowed a fair rate upon his invest¬ 
ment, the value of the property must be used as a basis for the 
determination of prices. In other words, in competitive indus¬ 
tries the investment value of a business is largely determined 
by net income; in public utilities income is largely determined by 
valuation. The question of a fair rate upon a fair valuation of 
property used by a public utility becomes the heart of the prob¬ 
lem of regulation. What is a fair rate? What is a fair method 
of valuing the property used by a public utility? 

A fair rate of return practically involves consideration of the 
returns received in industries in which competitive conditions 
prevail. Such a rate is made up of at least three factors—inter¬ 
est, payment for management, and an allowance for a risk. 
The interest rate should be the same as that which obtains in 
the investment market for long-time and safe investments. The 
allowance for management would be somewhat more difficult 
to determine. In public utilities, under regulation, risk would 
be reduced below that of the average business subjected to 
competition. One practical way of determining whether the 
rates are or are not fair would be to note the effect upon the 


PUBLIC UTILITIES 


209 


market price of the securities of the utility. If rates are too 
low, the market price of the securities will fall below the valua¬ 
tion as determined by governmental authorities. If rates are 
too high, the market price will rise considerably above the 
valuation figure. 

The valuation, or rate-base, problem has two aspects. It may 
be assumed that the public utilities ought as far as possible to be 
treated as competitive conditions—if existing—would indicate. 
On the other hand, the existence of monopoly conditions may be 
frankly recognized. It is assumed that the question of fair rates 
and fair returns must be based upon other hypotheses than that 
of competition. One leads to the theory of reproduction cost as 
the proper basis of valuation, and the second logically points 
toward the acceptance of original cost, provided the expendi¬ 
tures were prudently and honestly made. The federal Supreme 
Court, which has the last word under our constitutional system, 
seems to favor the reproduction-cost theory. The Interstate 
Commerce Commission, on the other hand, is inclined toward the 
original cost theory. Original cost—investment—is a definite 
fact. Reproduction cost must remain more or less theoretical. 
It is not an established fact based upon definite evidence. If we- 
accept the view that the railways and the public utilities perform 
public functions and are, in the main, non-competitive, it appears 
that we are logically driven to accept original cost, in so far as it 
can be ascertained. Two modifying elements, perhaps, should 
be given consideration. Some increase or decrease in returns 
should be allowed as the general price level rises or falls and the 
purchasing power of the dollar falls or rises. In the second 
place, it may be desirable to make allowance for good manage¬ 
ment. An inefficiently managed plant will show low net returns. 
In fixing rates and in deciding upon fair returns, it would seem a 
counsel of wisdom to allow good management to be financially 
rewarded and bad management to be penalized. Governmental 
regulation should stimulate and assist the management of 
utilities in effecting economies and in improving technical 
methods. At the present, neither basis of valuation has a 
clear field and formidable arguments may be advanced against 
either plan. 


210 


ECONOMICS 


As long as a public utility does its business within the borders 
of a state, regulation is a state matter. With the development 
of interstate business in electric current for lighting and power 
and the organization of large holding companies controlling 
operating companies situated in different states, it may be 
necessary for the federal government to step into the picture. 
The first state commission with adequate power for regulating 
public utilities, other than railways, was established in Wisconsin 
in 1905. At the present time all of the states except Delaware 
have public service commissions. The powers granted these 
commissions vary greatly from state to state. In the states 
having commissions endowed with considerable authority, these 
bodies are charged with the duty of regulating rates and the 
quality of the service rendered by public utilities. In the major¬ 
ity of the states the commissioners are appointive officials. The 
amount of capital invested in the public utilities of the United 
States, the strength of the corporations regulated, and the vital 
importance and the variety of the services rendered to the com¬ 
munity make the problem of adequate and just regulation diffi¬ 
cult of solution. Regulation is still on trial in the United States. 

• If, finally, a verdict of failure is given by public opinion, we shall 
not return to non-interference policy. In such a contingency the 
next step will be governmental ownership and operation of utili¬ 
ties. The future of regulation depends largely upon the attitude 
of the utilities themselves. If the managers and owners of public 
utilities are content to make and receive reasonable profits and 
are willing to cooperate with governmental commissions in im¬ 
proving the service, the regulatory difficulties will fade away, 
but if they strenuously insist upon making large monopoly 
profits, regulatory bodies will ever be fighting with the man¬ 
agers and owners of the utilities—a situation which makes 
neither for efficiency nor for fair dealing. 

Public Ownership and Operation. The inclusiveness of the 
term “affected with public interest” as applied to business has 
increased as density of population and specialization of occupa¬ 
tions have become greater. Recent decisions of the Supreme 
Court of the United States indicate a tendency to curb further 
attempts at extending the range of industries affected with 


PUBLIC UTILITIES 


211 


public interest. That such businesses should be either regulated 
by governmental authority or placed under governmental 
ownership and operation is now accepted with a fair degree of 
unanimity. Proposals to extend further the scope of public 
regulation or operation into the field of business continues to 
meet with strenuous and vociferous objections. Expert advice 
in the realm of science or engineering is usually accepted with¬ 
out bitter opposition, but when the expert invades the field of 
economics and his advice runs counter to the immediate busi¬ 
ness interests of individuals and corporations, the expert is 
frequently assailed vigorously. Facts and investigations in 
regard to the desirability or undesirability of governmental 
operation of railways or other public utilities are looked upon 
through the colored glasses of personal interest. It is practically 
impossible to obtain as cold, calm, and scientific weighing of 
evidence in this connection as in the case of the study of stresses 
and strains in bridge building or in machine design. The inter¬ 
pretations of statistics are twisted consciously or unconsciously 
by the economic interests involved. The investigator, too fre¬ 
quently, starts with a thesis and weighs the importance of evi¬ 
dence by its effect upon the concept to which he originally gave 
his allegiance. The scientific attitude is difficult to maintain 
in any discussion of public ownership and operation of busi¬ 
nesses clearly affected with public interest. 

There are, however, certain governmental activities which 
have been carried on for a period of years and which are now 
almost universally accepted as suitable for public operation. 
Among these activities are the minting of money; the operation 
of a postal service; the building and maintenance of roads; the 
operation of public schools, libraries, playgrounds, the govern¬ 
ment printing office, and city water works. Few voices are 
raised demanding the return of these governmental activities 
into the hands of private business organizations. Proposals 
looking toward governmental operation of the steam or electric 
railways, of electric light and power plants, of gas plants, and 
of the telephone industry are fiercely attacked. These are 
businesses affected with public interest and operated under 
conditions approximating monopoly. 


212 


ECONOMICS 


Only communists and socialists are seriously arguing that 
businesses in which competition continues to play an important 
r61e should be owned and operated by governmental units. The 
most generally accepted tests of probable fitness for public 
operation are monopoly and maturity.” According to this 
point of view, competitive industries and those public utilities 
in which extensive technical and managerial changes may 
reasonably be anticipated are not ripe for governmental opera¬ 
tion. The relative immaturity of the electric light and power 
industry as contrasted with a city water plant is one, but not 
the only, reason why there is a greater tendency in this country 
to place water plants than electric light and power plants under 
municipal ownership. 

Private operation of business is as a rule more efficient and 
flexible than public operation. In order to avoid political con¬ 
siderations becoming the chief determinant of policies, a public 
industry is likely to become entangled in red tape and legal 
technicalities. However, large corporations often become vic¬ 
tims of red tape and inelasticity of program. Private ownership 
of public utilities may be more efiicient than public, but the 
heart of the problem centers in the tolls which the utilities are 
levying, under regulation, in the form of rates upon consumers. 
In times of high prices the insistence upon reproduction value 
as the basis for the determination of rates, the construction of 
complicated and bewildering mazes of mergers, holding corpora¬ 
tions, and investment trusts, and other interesting financial 
legerdemain make possible the compounding of costs, expenses, 
and service fees. Are engineers and other experts in the public 
utility industries able to pass on to the public in lower rates 
and better service the results of their developmental work? 
Or, is it absorbed in the financial superstructure of large pri¬ 
vately operated public utilities? The control of public utilities in 
this country in the near future depends in no small degree upon 
the answer given to the questions indicated above. If public 
utilities curb their hunger for extraordinary monopoly profits, 
if they are willing to accept reasonable and regular profits and 
dividends, the trend toward public ownership will be slow in¬ 
deed. If, on the contrary, the public utilities try to exact the 


PUBLIC UTILITIES 213 

maximum possible in tolls and profits, a strenuous demand for 
public ownership may be expected. 

Public ownership of utilities is much more common in Europe 
than in the United States. In the electric light and power 
industry, several towns and cities of California have demon¬ 
strated the possibilities of municipal ownership and operation 
under American conditions. i In many European countries 
politics plays a smaller role in the selection of public employees 
than in the United States, and in morale and ability European 
public employees are superior to corresponding groups in Amer¬ 
ica. Capable public employees are frequently lured from the 
public service in this country by the higher salaries offered by 
private business. The development of public utilities is more 
advanced in the United States than in European countries. 
This situation is largely the result of conditions other than that 
due to private ownership and operation in this country. It is 
often urged that municipal lighting plants in the United States, 
unable to compete with privately operated plants, are decreas¬ 
ing in numbers and in relative importance; but larger numbers 
of privately owned plants are being purchased by large com¬ 
panies having huge central power plants and miles of high- 
tension wires. The electric plant producing electricity for the 
citizens of a town or a small city is being displaced by the central 
plant with its system of radiating high-tension wires. The small, 
isolated electric lighting plant, whether operated by a munici¬ 
pality or by a small private company, cannot long hold out 
against the large company. It is often urged that private own¬ 
ership of utilities results in political corruption. The utilities, the 
argument runs, directly or indirectly induce the officials of munic¬ 
ipalities to grant favors to the former. This argument in favor of 
public ownership of utilities seems weak when we recall that un¬ 
der public ownership similar men would control the expenditure 
of large sums of money with many opportunities for personal 
enrichment. The student should carefully weigh all arguments 
for and against public ownership and operation of utilities, re¬ 
membering that even experts may have their views colored for 
or against the plan by their own private interests in the matter. 

^ Bird, F. L., and Ryan, F. M., Public Ownership on Trial, Ch. I. 


214 


ECONOMICS 


Questions 

1. What is a public utility? 

2. Should a public utility be subjected to governmental regulation? 
Why? 

3. Is monopoly inevitable in pubhc utilities? Why? 

4. What facts would you desire in order to fix a fair rate for an electric 
Kghting plant? 

5. What basis would you recommend for the determination of fair rates? 

References 

Glaeser, M. G., Outlines of Public Utility Economics. 

Kirshman, J. E., Principles of Investment, Ch. 18. 

Mosher, W. E., Electrical Utilities. 

Raushenbush, H. S., and Laidler, H. W., Power Control. 

Rufener, L. a., Principles of Economics, Ch. 17. 

Taussig, F. W., Principles of Economics, Vol. 2, Ch. 64. 


CHAPTER XXII 


INTERNATIONAL TRADE 

Principles and Practices in International Trade. Interna¬ 
tional trade is often conceived to be tinged with mystery which 
is lacking when considering domestic trade. Trading across 
national boundaries is held to inject certain peculiarities into 
business. This is mere superstition or ignorance. There is 
nothing abnormal or peculiar about foreign trade. The mere 
crossing of an artificially drawn political boundary line does not 
alter the fundamentals of commerce. Exchange between England 
and the United States is not essentially different from trade 
between Cleveland and Florida. It is true that certain business 
customs have been evolved in foreign trade that are not followed 
in domestic trade, and the two countries use different monetary 
standards. Fundamentally, however, trade between nations 
and trade within a nation are matters of exchange of goods for 
goods; foreign trade is a modernized form of barter camouflaged 
behind bills of exchange, investments, and banking institutions. 

In order to understand clearly the essential elements in for¬ 
eign trade, let us assume a very simple case of two shipments of 
goods between New York and London in which four persons 
are concerned—two in New York and two in London. Let us 
assume that Smith, a New York exporter, ships a cargo of wheat 
to Roberts of London at a price of £1000; and that Jones, a New 
York importer, buys a cargo of woolen goods at the same price 
from Brown of London. Each one of these shipments might be 
paid in gold. In that case gold would be shipped from and to 
London in settlement of the shipments of merchandise. Let us 
suppose that Smith and Jones in New York are acquainted with 
each other. Smith may draw a draft or bill of exchange ordering 
Roberts to pay to Jones or order £1000 and charge the same 
to Smith’s account. Smith then sells this order to Jones and 

215 


216 


ECONOMICS 


receives £1000 for it. Jones indorses it, making it payable to 
Brown, and sends it through the mails to Brown in London. 
Brown collects the £1000 from Roberts. In this simple case the 
payments have been made without shipping gold at all. One 
payment has been made in New York and one payment in Lon¬ 
don and a bill of exchange has been sent through the mails from 
New York to London. According to established custom Roberts 
is expected to pay Smith in London. If Smith desires the gold, 
it would be necessary for him to import it from London. In like 
manner Jones is expected to pay Brown in London, and it would 
be necessary for Jones to pay the cost of shipping gold to London 
if payment were made in that way. In this case of exchange 
between New York and London which has just been considered, 
the woolen goods which Jones of New York buys is actually paid 
for, as far as international settlements are concerned, by the 
shipment of wheat made by Smith of New York. Goods im¬ 
ported are paid for by the exportation of goods. 

The case described above is much simpler than actual prac¬ 
tice. Importers such as Jones may not be acquainted with an 
exporter (Smith); the amount of the pa 3 niient to be made by 
Jones may not be identical with that owed by the London mer¬ 
chant Roberts to Smith. Other complications may easily be 
discovered. Banks dealing in foreign trade bills act as middle¬ 
men. A New York bank will have a London bank as a corre¬ 
spondent bank; the New York bank will have a deposit in the 
London bank. The accompanying diagram illustrates the actual 
process carried out in trade between London and New York.^ 
Smith takes his bill to the New York bank and sells it to that 
bank. The bank forwards it to the London bank which in turn 
collects the amount due from Roberts. In this manner the 
New York bank builds up its deposit in the London bank. 
Jones goes to a New York bank and buys a bill drawn by the 
bank upon its London correspondent bank. He sends the en¬ 
dorsed bill to Brown, who collects directly or through another 
London bank the amount due from the London bank upon 
which the bill is drawn. In this manner the deposit of the New 
York bank in London is reduced. 

1 Cross, I. B., Domestic and Foreign Trade, p. 125. 


INTERNATIONAL TRADE 


217 


SMITH 

IN 

NEW YORK 


Roberts owes Smith 


ROBERTS 

IN 

LONDON 


Smith draws draft on 
Roberts and sells it to a 
New York bank. 


London bank 
collects from 


Roberts. 


NEW YORK BANK 


LONDON BANK 


Sends draft to 
London bank. 


Jones buys draft from 
New York bank and mails 
draft to Brown in London. 


Brown collects 
from London bank. 


JONES 

IN 


BROWN 

IN 

LONDON 


NEW YORK 


Jones owes Brown 


The par of exchange is 4.86+. This is the gold price of the 
English pound as compared with the American dollar. The 
English pound is equal to $4.86+ in American money. Omitting 
from consideration invisible balances (which will be investigated 
later), if the value of goods exported from New York to London 
exactly equals the value of goods imported, the demand and 
supply of bills will be identical in amount. Gold would not be 
shipped to or from Europe. Bills of exchange would sell at par, 
$4.86+ for an English pound. The banks would, of course, 
charge small fees for their services. 

If, however, exporters like Smith export goods which cost 
more than the goods importers buy, more bills are drawn than 
are demanded. If no attention be paid to invisible items, it 
would soon be necessary to import gold to balance the surplus 
of goods exported over goods imported. As in the usual case 
of a large supply relative to demand, the price of bills tends 
downward below the par of $4.86+. Some exporters would be 
obliged to accept gold in London and pay the expenses of ship¬ 
ping it to New York. If the cost of shipping a pound ($4.86+) 
of gold, including crating, cartage, transportation charges, in¬ 
surance, and loss of interest during the period of shipment, is 
equal to three cents, bills may sell as low as $4.83+; that is, 
the par of exchange minus the shipping costs. If the discount 


218 


ECONOMICS 


were more, it would be more profitable to accept the gold in 
London and pay the cost of shipping gold. When exports are 
greater than imports, American exporters are obliged, invisible 
items aside, to accept less than par for their bills drawn in 
English pounds. 

On the other hand, when more goods are imported than ex¬ 
ported, the demand for bills exceeds the supply. Gold must be 
shipped from New York to London to balance exports and 
imports. Under these circumstances, the price of bills tends 
to rise. It may go as high as par plus the cost of shipping gold 
across the Atlantic, or approximately $4.89+. At that price 
the importer might pay for bills at the rate of $4.89+ for each 
English pound, or he might export gold to London. The cost 
under the hypothesis as to the cost of shipment would be ex¬ 
actly the same. When the total cost of shipping gold from 
New York to London, or the reverse, is three cents per English 
pound, the upper and lower “gold points’^ are $4.89+ and 
$4.83+. 

The International Balance Sheet. In the early period of in¬ 
ternational trade, exchange was largely that of goods for goods; 
balances were settled by the shipment of precious metals, gold, 
and silver. In recent generations international borrowing and 
lending have become important, and the expenditures of tourists 
abroad are not negligible. The early simplicity of visible trade 
has been complicated by the appearance of a multitude of in¬ 
visible items—that is, items which do not find a place in the 
published statistics of exports and imports. The explanation 
of the settlement of international trade by means of bills of 
exchange used in connection with the exportation and importa¬ 
tion of commodities must be carried a step further. 

The international trade balance of any nation consists prima¬ 
rily of export or credit items and import or debit items. Below is 
presented in brief form the chief items which appear in an 
American balance sheet. 

EXPORT ITEMS 

Visible Items 

Exports of merchandise 
Exports of money (specie) 


INTERNATIONAL TRADE 


219 


Invisible Items 

Payment to Americans of loans made to foreign governments, 
corporations, or individuals 

Payment of interest and dividends on investments and loans 
abroad 

American securities sold abroad 

Freight charges on exports carried in American ships 

Service to foreign tourists 

IMPORT ITEMS 

Visible Items 

Imports of merchandise 
Imports of money (specie) 

Invisible Items 

Purchase of foreign securities 

Interest and dividends paid to foreign owners of American secu¬ 
rities 

Payment of loans, etc., made to us by foreigners 
Freight charges on imports carried in foreign vessels 
Services to American tourists abroad 
Immigrant remittances to home countries 

If exact and complete statistics were available, the visible 
and invisible export and import items would exactly balance. 
The export items, except in the case of specie shipments, create 
a supply of bills, and the import items, except importations of 
specie, cause a demand for bills of exchange of the type dis¬ 
cussed above. An American tourist abroad spends his pur¬ 
chasing power in a foreign land and utilizes the goods and serv¬ 
ices obtained in foreign lands instead of importing and utilizing 
the goods at home, but in either case means of payment abroad 
must be provided. The tourist in foreign countries is a pur¬ 
chaser of bills of exchange or their equivalent. In like manner, 
the American investor who buys bonds of a foreign nation or 
the stocks and bonds of foreign corporations must find means 
of payment. He buys bills of exchange calling for payment 
abroad exactly as if he were an importer of merchandise. He 
actually imports foreign securities. On the other hand, when a 
foreigner buys American securities, the American owner may 
draw an order upon his bank for the amount agreed upon in 


220 


ECONOMICS 


the same fashion as would an American exporter of merchandise. 
In this case American securities are exported. 

When a country is shipping outside its borders to the people 
of other nations more goods than the people of the other coun¬ 
tries are sending to the first nation, the balance of trade is 
called ‘‘favorable.’^ If a farmer continued to send away more 
of his products than he received in goods, he would be con¬ 
sidered a poor business man, but if the entire nation does the 
same thing, we speak of its success. It is said to have a favorable 
balance of trade. If a country imports more merchandise than 
it exports, it is said to have an “unfavorable^' balance of trade. 

The use of these terms originated during the mercantilist 
period preceding the Industrial Revolution. It was a time when 
the nations of Northern Europe, and especially England, were 
beginning to develop a crude form of manufacture and were 
endeavoring to organize a monetary and a banking system. As 
England did not produce gold or silver, in order to obtain these 
essentials of a monetary system it was necessary to import them. 
The plan of the mercantilist group was to import raw materials, 
work these materials into finished goods, and export the latter. 
Since manufactured goods were more valuable than the raw 
materials used in their production, the exports were expected 
to exceed the imports in value. As invisible items in the inter¬ 
national trade balance were as yet practically nonexistent, the 
difference between exports and imports was balanced by the 
shipment of gold and silver to the country engaging in manu¬ 
facture. National wealth was conceived by the mercantilists 
to consist chiefly of the precious metals. A “favorable" balance 
of trade was thought to be favorable because it increased the 
stock of gold and silver, and, consequently, the wealth of the 
nation. Today economists are agreed that the words “favor¬ 
able" and “unfavorable" when used in connection with inter¬ 
national trade balances have no significance. A “favorable" bal¬ 
ance of trade may be undesirable. 

International Debts. In recent generations much borrowing 
and lending takes place across national boundaries. Individuals 
and corporations borrow of individuals and corporations in 
other countries. Occasionally a government borrows abroad 


INTERNATIONAL TRADE 


221 


either directly from another government or by selling bonds to 
individuals and corporations in foreign countries. During the 
World War the government of the United States made large 
loans to the Allied governments. International loans are not 
made in money; they are merely priced in money. Actually, 
loans and the payments of debts or of interest and of dividends 
call for the transfer of commodities. The War loan of several 
billions of dollars to the Allied governments was in reality made 
by shipping supplies and munitions. During the years 1915 to 
1920 American exports far exceeded the imports. We were pay¬ 
ing debts owed abroad, buying back American securities held 
abroad, and lending to European governments and corporations. 
The unprecedented excess of exports over imports enabled us 
to change debts into credits. Reparations, like debts, must 
also be paid ultimately in goods. 

A young nation emerging from frontier and purely agricul¬ 
tural conditions into an industrial status may hasten its progress 
by borrowing from older countries. During this period the nation 
will have an unfavorable balance of trade; it will import more 
than it exports. It becomes what has been aptly described as 
an ‘‘immature debtor” country. As the borrowings of corpora¬ 
tions and individuals increase, larger and larger interest and 
dividend payments must be made to the corporations and in¬ 
dividual investors of other countries. Such payments must be 
made, it will be recalled, in commodities. As time goes on, the 
payments of interest and of the principal of debts require 
larger and larger amounts of exports. Presently, a nation 
which is a debtor of long standing must export more than it 
imports; its balance of trade becomes favorable. Only in this 
fashion can interest and international debts be paid. This 
statement should be qualified somewhat. If the creditor nation 
sends large numbers of tourists to the debtor nation or if the 
debtor nation’s vessels act as the carriers of goods shipped by 
the business units of the creditor nation, such services may aid 
in the payment of international debts and interest. When the 
debtor country reaches the stage in which it begins to pay debts 
and interest in larger amounts than it continues to borrow, it 
passes into the “mature debtor” class. The United States 


222 


ECONOMICS 


ceased being an immature debtor nation about 1874. We con¬ 
tinued as a mature debtor nation with a favorable balance of 
trade until the World War. 

Creditor nations may likewise be classified as immature 
or ‘^mature.” In an immature creditor nation business interests 
and individual investors begin to look abroad for investments 
which promise higher returns than at home. During this stage 
exports exceed imports; the balance of trade is favorable. The 
corporations and individuals of the nation are shipping com¬ 
modities abroad in excess of imports and are receiving promises 
to pay at some future date. Sooner or later a creditor nation 
that continues for a long period of years to lend abroad will 
build up large credits calling for dividend, interest, and princi¬ 
pal payments. When the latter payments become greater than 
new loans abroad, the country becomes a mature creditor na¬ 
tion. Its imports now exceed its exports; the balance of trade 
is unfavorable. For many years previous to the World War 
England was a mature creditor nation. An immature debtor 
and a mature creditor nation have unfavorable trade balances; 
a mature debtor and an immature creditor nation have favor¬ 
able balances.^ 

The shift from being an immature creditor nation with a 
favorable balance of trade to the status of a mature creditor 
nation with an unfavorable balance is likely to cause pains of 
adjustment. The United States is now facing such an adjust¬ 
ment, unless we cancel the debts owed by foreign countries to 
the government of the United States. If European nations and 
corporations begin to pay their debts, we must accept as imports 
large quantities of commodities, many of which will compete in 
our markets with goods produced at home. Objections will im¬ 
mediately be raised by the producers of such commodities. For 
example, if payment be made in steel products, the steel interests 
will object, and if cloth be sent, the textile group will object. 
Large international payments of debts are not easy to make on 
the part of debtors, and, strange though it may appear, such 
payments are often difficult to make because of objections aris¬ 
ing within the creditor nation. In international trade we seem to 

1 See Bye, R. T., and Hewett, W., Applied Economics, pp. 380 ff. 


INTERNATIONAL TRADE 


223 


accept readily the notion that ^‘it is more blessed to give than to 
receive/^ 


Questions 

1. Can a country be prosperous without stimulating exportation? 

2. Show that imports are actually paid for by exports. 

3. How must international debts be paid? 

4. Explain how bills of exchange are used in foreign trade. 

5. What are invisible balances? 

6. What are gold points? 

7. What is the significance of a favorable balance of trade? 

References 

Bye, R. T., and Hewett, W., Applied Economics, Ch. 8. 

Cross, I. B., Domestic and Foreign Exchange. 

Griffin, C. E., Principles of Foreign Trade. 

Litman, S., Essentials of International Trade. 


CHAPTER XXIII 


THE TARIFF 

Free Trade, Tariff for Revenue Only, and a Protective Tariff. 

When goods are imported into a country which imposes a tariff, 
duties are collected at the port of entry and export duties may 
also be imposed. The Federal Constitution, however, forbids the 
levy of an export duty by our government. When no import or 
export duties are levied, free trade is maintained by the nation. 
Within the boundaries of the United States free trade exists. No 
state can erect tariff barriers against goods produced in another 
state. The United States constitutes a great free-trade area. 

A tariff for revenue only is imposed upon articles not produced 
in the country. Great Britain is a tariff-for-revenue-only coun¬ 
try. Great Britain levies low tariff duties upon such articles as 
coffee, tea, sugar, and tobacco since there is no home production 
of these commodities. Home industry is not protected. The 
prices of these articles are raised somewhat because of the tariff 
duties. A protective tariff, on the other hand, is levied upon 
articles produced or which may be readily produced within the 
country. The highest form of protective tariff would be an 
embargo. Such a measure would protect but would not produce 
revenues for the government. The rates levied under a protec¬ 
tive tariff law, which is also a revenue measure, must not be too 
high. Revenue is collected only when goods are imported from 
abroad. A tariff on imports tends to raise the price charged for 
the imported article, and consequently allows the home pro¬ 
ducer to charge more for the portion of the supply of the pro¬ 
tected commodity which is produced at home. Protection 
means paying more for the protected goods temporarily or 
permanently, but the government derives a revenue only from 
the portion of the supply of an article which is imported from 
abroad. Since a protective tariff constitutes an artificial barrier 
to the free movement of goods from one country to another, it 

224 


THE TARIFF 


225 


may not inappropriately be called a substitute for bad roads. 
When transportation facilities were very bad, no protective 
tariffs were necessary. 

Arguments for Free Trade. Free trade within the United 
States allows the Imperial Valley to specialize in growing certain 
fruits and vegetables. These products are shipped to distant 
towns and cities. In turn, these towns and cities send their 
fabricated goods to the families of the Imperial Valley. Terri¬ 
torial division of labor is highly developed as a consequence of 
good transportation facilities and in the absence of hampering 
tariff regulations. The advocates of free trade insist that un¬ 
restricted trade increases total productivity, as it allows each 
section and each country to devote a large share of its productive 
efforts to the preparation and sale of such products as it has 
special advantages in producing. These may be exchanged for 
commodities produced by another section or country. To 
hamper or to prevent such an interchange of goods would 
oblige each country to produce articles for which it is not well 
adapted. The prosperity and total productivity of two nations 
may be threatened by forcing each to produce all articles 
supplied to its people. 

The Infant Industry Argument for a Protective Tariff. One 

of the earliest and best arguments in favor of a protective tariff 
system is called ‘‘ the infant industry argument.’’ Friedrich List, 
a German economist who lived for several years in the United 
States, presented this argument in its best form. A country in 
the agricultural stage may find it difficult, because of the com¬ 
petition of more industrially advanced countries, to develop 
manufacturing industry. A tariff judiciously placed upon the 
products of certain manufacturing establishments for which the 
backward country is well adapted will hasten the transition 
from agriculture to manufacture. Without such protection the 
older industries in other countries will be able to drive out the 
infant industries before they have an opportunity to gain 
strength and reduce their costs of production. According to 
List, after an infant industry has been protected for a period of 
years, it should become strong enough to stand on its own feet 
and face its competitors from other parts of the world. When 


226 


ECONOMICS 


the infant has grown strong, protection should be removed. As 
advocated by such protectionists as James A. Garfield, protec¬ 
tion leads in due time to free trade. 

Unfortunately, in actual practice, mistakes may be made. 
Either industries may be selected which are never able to com¬ 
pete with the foreigner on an equal footing, or, after the industry 
has become strong, it continues to demand protection and to 
use infiuence to prevent the tearing down of its own particular 
tariff wall. Manufacturing industry in the United States began 
on the Atlantic Coast. It has spread westward steadily without 
the aid of a tariff protecting the infant Middle West from the 
older industries of New England, New York, and Pennsylvania. 
Is it not probable that well-adapted industry will go where 
opportunity knocks, without the sheltering arms of the tariff? 
In 1930 the actual principle followed in tariff making was that 
of using the tariff to resuscitate ailing industries. Congress 
apparently looked upon the tariff as a perpetual guardian of 
manufacture. This is the infant industry argument gone sadly 
astray. 

The Home Market Argument. This argument was popular¬ 
ized by Henry Clay. He declared that the development of 
industry in this country would make a home market for the 
products of the farm and of the factory as well. What the advo¬ 
cates of the home market did not see, or ignored, was the 
fundamental principle that when imports are cut off by develop¬ 
ing certain kinds of home industry behind a tariff wall, exports 
of goods produced by other unprotected home producers are 
reduced. Imports are paid for by exports. If we reduce our 
purchases abroad, the foreigners must in turn cease buying so 
much of us. In the early part of last century, and perhaps down 
to the present time in a lesser degree, the home market is more 
stable and less likely to be affected by wars and internal com¬ 
plications than is the foreign market. From the point of view 
of stabihty of markets, the home market argument has validity. 

The Wages Argument. Originally, advocates of a protective 
tariff argued that since the United States was a new country 
with great quantities of undeveloped land and natural resources 
but with a scarcity of wage workers, wages were high in this 


THE TARIFF 


227 


country. In order to develop American industry, it was neces¬ 
sary to pass protective tariff laws because wages were high. 
Later, after the workingmen of the North were allowed to vote, 
the argument was modified. It was then urged that a protective 
tariff was needed to keep wages high. Otherwise, the competi¬ 
tion of lower-paid foreign workers would force downward the 
general level of wages. 

It is clear that low wages are often dear wages and that high 
wages may be low-cost wages. Chinese workers receive low 
wages, but the cost of production per unit of output is not low. 
Highly paid American workers using up-to-date machinery and 
directed by skilled management are highly efficient. High money 
wages and low costs may be found in the same establishment. 
Tariffs do not increase the general level of wages. ^ If a country 
is rich in natural resources, sources of power, and scientific and 
managerial talents, high standards of living may be maintained. 
A protective tariff would keep out the products of cheap labor, 
but the tariff would avail little in maintaining high wages unless 
immigration was checked. 

The War Argument. This argument in a slightly modified form 
may also be presented as one in favor of diversified industries 
or in favor of economic self-sufficiency. Fundamentally these 
three arguments are alike. For various reasons it is held to be 
wise to stimulate diversification of products and industries. 
In times of war, a nation with highly specialized goods may be 
at the mercy of a foe able to blockade or cut lines of communi¬ 
cation and trade. Diversified industries also make a nation feel 
independent; a spirit of nationalism is nurtured. Too great 
industrial specialization may result in drab and unattractive 
uniformity. These arguments may be conclusive from a political 
or a cultural point of view, but let us understand that it may 
be expensive to develop and maintain certain industries, de¬ 
sirable in war times or for economic self-sufficiency. In dis¬ 
cussions on the tariff question care should be taken to distin¬ 
guish carefully between arguments which are primarily economic 
and those which are essentially political. A protective tariff 
may be costly from an economic point of view, but political 

1 See Chapter on Wages. 


228 


ECONOMICS 


considerations may overbalance the former. It may be inefficient 
and uneconomical to produce certain kinds of materials which 
are essential in time of war, but considerations connected with 
the requirements of national defense will lead to the adoption 
of a tariff fostering the home production of such materials. 

Equalization of Cost. The foregoing arguments in favor of 
a protective tariff are the traditional ones hallowed by age and 
the prestige of statesmen of preceding generations. Alexander 
Hamilton, as the first Secretary of the Treasury, presented a 
famous Report on Manufacture which included these old argu¬ 
ments in a pleasing and persuasive fashion. In recent years only 
one important new argument for a protective tariff has been 
developed. It has been urged with much earnestness that the 
tariff should be levied according to the difference in the cost of 
production at home and abroad. This policy would enable home 
producers to meet fairly, it is asserted, competition from abroad. 
It evidently would offer some protection to such industries as 
were already established here and which had not yet been able 
to lower their costs to a point equal to or below those of foreign 
producers. This policy seems to be a sort of hang-over from the 
infant industry argument. The industry protected does not 
grow up, but, since it has started, give it protection according 
to the equalization principle. This argument has certain ele¬ 
ments of plausibility. The practical difficulties are, however, 
a legion. Different producers of a commodity at home and 
abroad have different costs of production. In the process of 
equalization, which shall be selected as basic—the highest- 
cost firm at home and the lowest-cost producer abroad, or the 
average, or some other combination? And, further, how can 
we ascertain accurately and comparably the relative costs of 
production of the different home and foreign producers? Cer¬ 
tainly other nations are not likely for this purpose to oblige 
their producers to keep and disclose to American authorities 
cost accounts. The obstacles in actual practice seem insuperable. 

Why Does the Tariff Controversy Continue? Economists in 
the United States have as a rule opposed a high protective 
tariff and today are practically a unit against revision upward. 
The validity of the infant industry argument in the early years 


THE TARIFF 


229 


of our industrial development and of the war argument has 
been conceded by many students of economics. But the United 
States is now a highly developed industrial nation blessed 
with diversified industry. Neither the infant industry nor the 
war argument seems specifically appropriate at the present time. 
In the face of such considerations, why does the protective tariff 
system continue to draw powerful support? The answer to this 
conundrum may be discerned by noting that the economists 
look to general and long-time considerations, while the ardent 
supporters of a protective tariff system are individuals and 
groups of individuals who hope to receive direct and immedi¬ 
ate benefit from a tariff protecting businesses in which they 
are directly or indirectly interested financially. One view em¬ 
phasizes that indefinite entity called ^‘general welfare.’’ The 
advocates of a protective tariff see benefit to their business and 
their group, or to the section of the nation in which they live, 
and, consciously or unconsciously, they translate special benefit 
into general good. All of us are prone to feel that benefit to us 
and to our friends is also desirable to society as a whole. In 
1880 General Hancock, candidate for the presidency, asserted 
that the tariff was a local matter. He was laughed at as an ig¬ 
noramus, but fifty years later a leading financial journal ^ de¬ 
clared that ^Hhe tariff is a local question.” The protective tariff 
struggle is interminable; it is concerned primarily with rates 
and with advantages for this locality or that industry. 

Few students of the tariff problem would advocate tearing 
down completely and at once the American tariff wall. Indus¬ 
tries have been built up and capital invested in business which 
would be seriously affected by a great and sudden reversal of 
our traditional tariff policy. It may, however, be safely urged 
that no further increases in protective tariff rates are warranted. 
A program of gradual revision downward instead of upward 
should be followed. Higher tariffs will tend to raise rather than 
lower the cost of living here and abroad. The following impor¬ 
tant groups in the community can scarcely hope to gain by an 
increased measure of protection: farmers; miners; construction 
workers; transportation and public utility workers; professional 

^ The Commercial and Financial Chronicle, April 5, 1930. 


230 


ECONOMICS 


men and women; employees in banks, hotels, retail and whole¬ 
sale trades, and newspaper offices; exporters; investors in foreign 
securities. Furthermore, higher tariffs invite reprisals from 
other nations.^ President McKinley in his last speech in 1901 
very wisely declared that ‘‘a system which provides a mutual 
exchange of commodities is manifestly essential to the continued 
and healthful growth of our export trade. We must not repose 
in fancied security that we can forever sell everything and buy 
little or nothing.’' A protective tariff by reducing imports must 
also tend to reduce exports. Foreign trade is not one-way 
traffic. Prosperous national neighbors help to make for pros¬ 
perity at home. 

History of American Tariff Legislation. The new govern¬ 
ment was barely organized before financial problems were of 
necessity thrust upon it. To obtain essential revenues without 
causing too much opposition was not easy. Foreign trade was 
looked upon as fitting for the application of tax measures. 
Since the Constitution prohibited the levying of a duty on 
exports, the choice fell upon imports. The first tariff act was 
enacted in 1789. It was essentially a revenue measure, but the 
protective element was not lacking. The preamble of the bill 
stated that one of the objects was “the encouragement and 
protection of manufacture.” The average rate of duty on an ad 
valorem basis was about per cent. Obviously, a high rate 
would have been impossible of reasonable enforcement; it would 
have stimulated smuggling with which the newly organized 
government was not prepared to cope. Hamilton’s Report on 
Manufacture (1790) is a classic in the literature of protection. 

The Embargo and Non-Intercourse Acts, followed by the 
War of 1812, quite effectively protected American infant indus¬ 
tries. After the war ended, England prepared to fiood the 
American markets with English-made goods. American pro¬ 
ducers frantically clamored for protection, and the government 
needed more revenue. In 1816 Congress passed a tariff measure 
in which the element of protection to American manufacture 
unmistakably had a place. The Act of 1824 was a revision up- 

^ See statement signed by a large group of economists in the spring of 
1930. 


THE TARIFF 


231 


ward. The Tariff of 1828 was passed after a bitter struggle in 
which political considerations looking to the election of a Presi¬ 
dent in the fall were paramount. This act carried protection to 
American industries to the high-water mark of the pre-Civil 
War period. The Tariff of 1828 was called in derision the “tariff 
of abomination.” The South was, by 1828, definitely opposed 
to the protective tariff system. 

In 1832 another measure was passed which struck out some 
of the worst features of the Act of 1828, but did not materially 
reduce the element of protection. South Carolina, feeling that 
the industrial interests of the North proposed to make protec¬ 
tion permanent rather than a temporary expedient to bolster up 
infant industries, threatened to nullify the law by preventing its 
enforcement within the limits of the state. In this crisis Henry 
Clay offered a compromise measure, known as the Act of 1833, 
which provided for a gradual reduction of the tariff rates. The 
Acts of 1842, 1846, and 1857 placed protection somewhat in the 
background. 

The opening of the Civil War caused the government to make 
strenuous efforts to obtain new sources of revenue. A wide¬ 
spread system of internal revenue duties placed upon a large 
number of objects was developed. Duties were placed upon 
manufactured articles and upon various businesses and occupa¬ 
tions. In order to compensate for the internal revenue duties 
upon home industry, it was necessary to place new and higher 
tariff upon foreign-made goods. After the war ended, the inter¬ 
nal revenue system gradually disintegrated leaving chiefly duties 
on liquors and tobacco, but the compensating tariff duties were 
not reduced. During the Civil War the industries of the North 
grew in output and political influence, but the South had little 
political strength. The United States was definitely committed 
to the protective tariff policy. 

Only slight changes in the tariff rates were made in 1883 by 
the first general tariff law following the close of the Civil War. 
The Democrats elected a President in 1884. President Cleveland 
and his party were pledged to tariff revision downward, but 
only debates in Congress followed. With the return to power of 
the Republican Party, the McKinley Act of 1890 was passed 


232 


ECONOMICS 


revising rates upward, not downward. In 1894 the Democratic 
Party, again in control, reduced slightly the level of tariff rates. 
In 1897 the Republicans passed a measure which carried the 
protective wall even higher than in 1890. For twelve years, 
1897-1909, tariff tinkering was neglected. The Act of 1909 
modified many rates, but the net result was to revise rates up¬ 
ward rather than downward. After the Democratic Party came 
into power in 1913, rates were reduced, but the act was by no 
means a tariff-for-revenue-only measure. 

Again, in 1921 and 1922, the Republicans played the old 
game of tariff modification. Dyes and chemicals were protected 
by extremely high rates. An attempt was made to find a way to 
aid the farmer, and the President was given the power, within 
50 per cent, to revise any rate upward or downward in order 
to equalize the cost of production between the United States and 
foreign countries. In 1929 and 1930 tariff revision was again 
before Congress. The struggle was long and acrimonious. 
While the tide of public opinion seemed to be turning definitely 
toward revision downward, the net result of the Act of 1930 
was revision upward. In ‘^each and everyone of the fifteen 
general schedules the average rates were raised.^ According to 
an industrious statistician, the rates were changed on 1,122 
items; 887 were revised upward and only 235 downward. 

Tariff Making. In accord with a provision in the Federal 
Constitution, tariff measures originate in the House of Repre¬ 
sentatives. When tariff revision is under consideration, in the 
ordinary course of events the Ways and Means Committee 
holds hearings, studies reports and statistics provided by the 
Tariff Commission, writes and submits to the House a bill for 
consideration. Usually many amendments are offered in behalf 
of different sections of the country and special interests. Some 
of these amendments almost invariably are tacked on to the 
original measure. A process of log-rolling takes place. One repre¬ 
sentative who has a special interest to protect votes with others 
having similar designs, providing they vote for his pet measure. 
After the amended bill passes the House, it is placed before the 
Senate. There it is referred to a committee. This committee 

^ Taussig, F. W., Quarterly Journal of Economics, November, 1930. 


THE TARIFF 


233 


considers the bill and usually reports it out with some modifica¬ 
tions. The Senate may debate long and eloquently upon the 
measure, and more changes may be made. If the Senate passes 
the bill, it will be different in certain particulars from the meas¬ 
ure passed by the House. The next step is to refer the two 
measures to a joint conference committee. The bill as it emerges 
from the hands of the conference committee may or may not 
bear a resemblance to the original bills. If the conference com¬ 
mittee agrees upon the details, both House and Senate usually 
accept the conference measure. This long and devious process 
is accompanied by much lobbying and log-rolling. The bill in its 
final form is long and complex; it is a compromise and satisfies 
no one. If the President signs the measure, it becomes a statute. 

The United States Tariff Commission was established in 
1916. It exists for the purpose of studying the effect of tariff 
measures, and for aiding and advising Congress and the Presi¬ 
dent in regard to the principles and details of tariff legislation. 
The Commission has no power over tariff rate making; it is an 
advisory body. Unfortunately, the power and prestige of spe¬ 
cial interests are so great that the actual influence of the Tariff 
Commission on tariff legislation is not considerable. Protective 
tariff making in the United States is neither a scientific nor a 
dignified procedure; it is usually a sorry spectacle. 


Questions 

1. “Domestic trade cannot increase the wealth of the nation. It is only 
by foreign trade, and then only by getting more than is given, that 
a nation can enrich itself.” Discuss. 

2. “To the same extent that the home market is wrested from for¬ 
eigners and given to protected home producers, the foreign market 
is taken from unprotected home producers.” Is this statement true? 

3. “ It will never pay us to import anything which we ourselves can 
produce.” Do you agree? Why? 

4. “If we buy steel rails of England, we get the rails and England gets 
the money; but, if we buy steel rails at home, we have the rails and 
the money.” Comment. 

5. If we could induce the Chinese to buy large quantities of our manu¬ 
factured products, how would the Chinese pay for such goods? 


234 


ECONOMICS 


References 

Bye, R. T., and Hewett, W., Applied Economics, Ch. 17. 

Dewey, D. R., Financial History of the United States. 

Ely, R. T., et al., Outlines of Economics (5th ed.), Ch. 19. 

Stanwood, E., American Tariff Controversies in the Nineteenth Century. 
Taussig, F. W., Tariff History of the United States. 


CHAPTER XXIV 


BUSINESS CYCLES 

Science and Business. Until recently business organization 
and methods have not been carefully studied; the business 
world was thought to be one of mystery. Hard work, courage, 
and luck were the only recognized keys to success in business. 
Much of what was the unknown in physics, chemistry, geogra¬ 
phy, astronomy, and other sciences has been translated into 
the known and understood, but men have persistently looked 
upon the vicissitudes of the business world, upon booms and 
panics, upon depression and prosperity, upon successes and 
failures, as something beyond the yardstick of scientific investi¬ 
gation. Depressions and panics were looked upon as mysterious 
catastrophies which neither the individual firm nor the com¬ 
munity could guard against. In astronomy experts are able to 
foretell to a second the coming of an eclipse. The planet Nep¬ 
tune was discovered as the result of mathematical calculations. 
The movements of comets are predicted accurately. The 
Weather Bureau with some degree of accuracy is able to fore¬ 
cast a storm or an early frost. A voyage across the Atlantic 
Ocean was a matter of great uncertainty and risk at the end of 
the fifteenth century; today the elements of chance and hazard 
have been greatly reduced. Ships go swiftly, accurately, safely, 
and punctually from port to port. 

Business has been a vast, almost uncharted, sea swept peri¬ 
odically by dangerous and unpredictable storms. The business 
managers, engineers, and statisticians face a twofold problem. 
(1) To what extent may science, safety, and certainty be intro¬ 
duced into the world of business? (2) Is it possible to organize 
a business weather bureau which will enable the directors of 
business affairs to forecast business storms and clearing skies? 
Reasonably accurate forecasting of business weather will en¬ 
able business men not only to prepare for depressions but will 

235 


236 


ECONOMICS 


also help them to mitigate the evils of the depression. The 
Federal Weather Bureau can send out warnings of a storm; we 
can prepare for it; but up to date no way has been found of 
modifying the severity of the storm. If, however, business 
forecasting were fairly accurate and industrial leaders generally 
heeded the business storm signals, the depression would be 
nearly eliminated. 

As long as little or nothing is known of the causes of business 
fluctuations, as long as the relation of cause and effect is not 
understood in the business world, business men are peculiarly 
susceptible to fear. The primitive man was afraid of happenings 
which we are able to explain. A flood, an eclipse, an epidemic 
were considered to be caused by evil spirits. Men were afraid; 
they cowered. Until we began dimly to see the line of cause 
and effect in the case of floods, eclipses, and epidemics, little 
or nothing was accomplished in controlling such phenomena. 
The American people have been too frequently inclined to look 
upon a business crisis as did the primitive man upon a flood. 
It has been considered a catastrophy the cause of which is un¬ 
known, and no attempts have been made to ascertain rational 
remedies. The financier is especially susceptible to fear. Fright 
spreads easily from one group to another. As a consequence, the 
industrial and financial world is often thrown out of gear by 
the fear of a depression. 

America is standing on the threshold of a new era in regard to 
business philosophy, administration, and technique. The pio¬ 
neer found it economical to be wasteful of forests, game, and 
soil; rule-of-thumb and wasteful methods of doing things were 
not harmful in the pioneer period of American life. Such busi¬ 
ness as was carried on was small-scale and highly competitive. 
There was little of teamwork or of scientific methods. As the 
years passed and the population increased rapidly, as markets 
became nation-wide and world-wide in extent, and as one indus¬ 
try became more and more dependent upon the effective and 
continuous functioning of others, Americans began to look with 
increasing suspicion upon waste and muddling through. The 
engineer and the research expert appear, and conservation and 
science become familiar words in our vocabulary. Applied 


BUSINESS CYCLES 


237 


science is now taking a prominent place in the field of business 
endeavor; men are thinking and writing about ^Hhe emerging 
profession of business/^ The business man of a generation or 
more ago gloried in his ability to fight hard and to get out of 
business situations which threatened him with bankruptcy. 
The up-to-date business man is using research and statistical 
methods to forecast business emergencies with the bright hope 
of greatly reducing the dangers which beset the course of the 
old-fashioned business man who scorned statistics and research. 
Today it is “research or retrogression.’’ Today the successful 
business man must of necessity plan for the future. His success 
or failure depends upon statistics and research instead of upon 
hunches and guesswork. The wide-awake industrial leader is 
getting out of “hunches common” and into “research pre¬ 
ferred.” The foundations of a science of business are being 
quietly laid. Industrial leaders are being more and more inter¬ 
ested in the causes of business cycles and business changes. In 
spite of the recent flare for stock-market speculation, the new 
type of business management aims to reduce speculation to a 
minimum and to obtain as far as possible regularity and cer¬ 
tainty in business affairs. 

Industrial or business research is a systematic method of 
improving our ways of producing, marketing, and utilizing 
goods, of adding to our store of knowledge. Research is not a 
magic wand; it is not a cure-all for the ills which afflict the poorly 
managed establishment; it is a tool which, properly used, makes 
business judgment and experience more effective. Statistics 
may make evident past errors, but the chief purpose of appeal¬ 
ing to statistics and research is that of preventing serious mis¬ 
takes in the future. Business men will more and more use the 
results of research in order to anticipate coming events in the 
economic field. 

Rhjrthms in Industry. While the business cycle was not recog¬ 
nized before the Industrial Revolution which ushered in the 
age of machinery, power, and credit, there may be discerned in 
the history of civilization many rhythmic movements. Nations 
and peoples are prosperous at one time and later in a condition 
of famine and pestilence. There have been many a rise and fall 


238 


ECONOMICS 


of nations, civilizations, and peoples. History is an interesting 
and variegated story of change and of spirals which do not quite 
return to the same place. Economic and social life is never 
static. A cycle or rhythm may be found in many industries; 
the problem of business regularization is difficult. Retail stores 
have rush hours and busy seasons; electric lighting plants are 
troubled by “peak loads’’ followed by little demand at other 
times; the street railway finds it difficult to meet the demands 
made for transportation at certain morning and afternoon 
hours; farming and other industries are subject to great seasonal 
fluctuations. A university stadium used for football games is 
an extreme example of sudden extraordinary utilization for a 
few short periods with practically no utilization for the remain¬ 
der of the year. Amusement houses are subject to extreme 
alternations or rhythms in demand. Outside the business world 
rhythms are of common occurrence. Rest and recuperation 
after strenuous exertion, the alternations of day and night, and 
of the seasons, are familiar examples. Statisticians have noted 
a marked periodicity in the prevalence of typhoid fever and 
other infectious diseases. There is a recurrence of a maximum 
and a minimum in the number of cases. Life is replete with 
rhythms. The business cycle is only one of many which inti¬ 
mately touch our daily life. 

What Is the Business Cycle? The constant and somewhat 
regular ebb and flow in business affairs, the succession of pros¬ 
perity and depression, or of “good” and “bad” times, consti¬ 
tutes what is called “the business cycle.” The term has been 
in common use for only a comparatively short period of years. 
The attention was first directed to the dismal and dramatic 
episodes called crises or panics. These were vividly described 
and investigated long before the discovery was made that a 
crisis or a panic was only a segment of a somewhat regularly 
recurring cycle. No two business cycles are exactly alike in 
duration or in amplitude or shape of the curve drawn graphi¬ 
cally to depict the rise and fall of business prosperity. As ordi¬ 
narily described, a business cycle exhibits four distinct phases 
of varying duration—prosperity, crisis (sometimes accompanied 
by a bank panic), depression, and recovery. 


BUSINESS CYCLES 


239 


A description of the phenomena of a business cycle may begin 
with any one of these four phases. The one first described will 
have developed out of the phase directly preceding it. The 
prosperity’^ phase, for example, has grown out of the one de¬ 
nominated “recovery.” Rising prices, greater productivity, 
renewed activity in building, large profits, high interest rates, 
and a feeling of optimism are the typical marks of the prosperity 
portion of the cycle. Before this phase ends, over-development 
in many lines of industry and an unwise extension of credit are 
likely to take place. Finally, the top-heavy credit structure is 
subjected to some new and unexpected strain, and a liquidation 
of credit begins. Improvements are stopped, old orders can¬ 
celled, and few new orders are placed. Plants shut down or run 
on part time, unemployment mounts, purchasing power is cur¬ 
tailed, prices of commodities and of corporation stocks are 
lowered, and interest rates fall. Before the Federal Reserve 
Banking System was inaugurated, a bank panic often accom¬ 
panied a crisis. A number of banks closed their doors and de¬ 
positors in others were unable to draw out funds deposited in 
these banks. 

A crisis is usually of short duration, but it is followed by a 
longer period of depression. Pessimism is now the dominant 
note. Enterprise is checked by the prevalence of low prices, by 
small prospective profits, by lack of purchasing power, by diffi¬ 
culty in getting credit, and by the general feeling that the day 
of good times is past. When the crisis and depression begin, in¬ 
ventories and accumulated stocks are usually large. Gradually 
as time elaspes these stocks are sold. Presently demand begins 
to pick up and productive activities to revive. Costs and inter¬ 
est rates are low; this makes the road to recovery easier to fol¬ 
low. Bank deposits tend to decline and bank reserves to in¬ 
crease. Banks lower interest rates in order to stimulate loans to 
conservative business firms. Capital for improvements and 
additions can be obtained at low rates and prices are also low. 
Alert business leaders begin to take advantage of these condi¬ 
tions. In fact, it is usually better to enlarge a plant in a period 
of depression instead of near the end of the phase of prosperity 
and high prices. Business men, however, who follow hunches 


240 


ECONOMICS 


are likely to be pessimistic when they should be optimistic, 
and optimistic when pessimism is the appropriate frame of mind. 
Gradually, as the depression proceeds, business prospects look 
brighter, more workers get jobs, and, therefore, buy more. The 
dark clouds of pessimism gradually fade away, recovery merges 
into prosperity, and a new cycle is on its way. 

Effects of Business Cycles. Business policies are materially 
affected by alternations in the business cycle. It also has impor¬ 
tant political, sociological, and psychological effects. The birth¬ 
rate of new industries and plants is high during prosperity. A 
quotation from Babson’s Barometer Letter of December 20, 
1921, is pertinent. “From 1918 to the middle of 1920 between 
two and three times as many mills and factories were built as 
in average times. The cost of these new plants was about double 
their replacement cost today. New machinery and appliances 
were bought in like proportion. Hundreds of new firms sprang 
up. Producing costs and producing capacity were geared up to 
an abnormal demand. The same capacity and the same over¬ 
head costs are excessive for average times.” 

In a time of depression the tendency is to emphasize the value 
of hard work and temperance. Business managers try to cut 
overhead expenses. Long and expensive vacations are frowned 
upon; less golf is played by business leaders. Willingness to 
work and to think become more fashionable than in the easy 
period of prosperity. Labor policies are adjusted somewhat to 
meet cyclical changes. During prosperous times unemployment 
is reduced; workers are not likely to lose their jobs because of 
lack of work. Under the traditional methods of shop operations, 
the workers slow down and are less efficient in a time of pros¬ 
perity, while in a time of depression, each worker is afraid of 
being let out. He speeds up and works more carefully. This 
situation may be due to unwise or inadequate personnel meth¬ 
ods. During the period of rapidly rising prices before 1921, 
employers, induced by a scarcity of workers, large turnover of 
labor, and increasing inefficiency in the plant, adopted with 
extraordinary alacrity new personnel policies. Employment 
managers were installed, shop committees organized, factory 
magazines printed, etc. When the depression came, many com- 


BUSINESS CYCLES 


241 


panies consigned these newfangled policies to the scrap heap 
and went back to the old and familiar ways of ^‘putting labor 
in its place.” 

In the political field it is well known that a serious depression 
is likely to result in the defeat of the national party then in 
power. Radical groups, such as the Populist Party, the Social¬ 
ist Party, the Non-Partisan League, the Farmer-Labor Party, 
and the Workers’ Party, usually wax stronger in a period of hard 
times. Farmers are discontented and radical when the farming 
industry is not prosperous. Before the Civil War the fiuctua- 
tions in the price of cotton constituted a barometer registering 
content or discontent in the South. 

An individual’s outlook upon life is affected by his financial 
condition. The prosperous individual is likely to be content 
with things as they are. Men without property or a stake in 
life are discontented with the present regime. They make good 
soil for radical propaganda. Many a radical has been trans¬ 
formed into a conservative as the result of personal prosperity. 
Crime waves are not entirely unrelated to changes in the busi¬ 
ness cycle. A period of depression tends to create an atmosphere 
of emotionalism. Students of crowd phenomena have asserted 
that powerful religious revivals often follow the spread of a 
period of economic depression. A curve representing waves of 
optimism and of pessimism would be similar to a business cycle 
curve, but the former lags in time somewhat behind the latter. 

Causes of Business Cycles. Many divergent theories have 
been devised to account for cyclical movements in the world 
of business. One theory places its faith in changes in weather 
conditions. The sun-spot theory, advanced by an English 
economist, rests upon an alleged periodicity of these disturb¬ 
ances. It was argued that sun spots affected the amount of 
rainfall and the temperature, which in turn affected the size of 
the agricultural crops and the buying power of farmers, and, 
finally, produced a maladjustment in business affairs. More 
recently. Professor Moore of Columbia University reached the 
conclusion that an eight-year cycle in the growth of agricultural 
products exists. In turn this was connected with certain periodic 
movements of the planet Venus. This cycle in agricultural out- 


242 


ECONOMICS 


put was held to be influential in causing similar cycles in finished 
goods. It might be pointed out, however, that the crisis of 1920 
was preceded by a year, 1919, of fairly good crops. Recent 
studies by the National Bureau of Economic Research have 
led to the conclusion that the duration of business cycles in this 
country have varied from about two years to approximately 
ten years. This fact would seem to dispose of the sun-spot and 
similar theories. 

Psychological theories assume that waves of over-confidence 
and of pessimism follow one another in the business world and 
cause the alternations of the business cycle. Lack of confidence 
in the business future is held to induce forces which usher in a 
depression. A perpetual air of confidence would smooth out the 
business cycle, declare those who accept psychological manifes¬ 
tations as the cause of the alternations of the business cycle. 
Variations occur in the moods of people engaged in business, 
but these moods depend in no small degree upon the prospects 
of profitable business in the near future. This theory appears 
to reverse cause and effect. 

The socialists have developed an exploitation theory of crises. 
The worker is not given in wages as much as he earns or pro¬ 
duces. Capitalists of various and sundry kinds draw income in 
the form of rent, interest, and profits. Since the worker is 
robbed of a part of the fruits of his toil, he cannot purchase as 
much as he produces. Periodically a glut appears on the market 
and a crisis follows. Various other theories of over-production 
and under-consumption have been presented. Human wants are 
sufficiently elastic to make over-production of all sorts of prod¬ 
ucts practically out of the question. If, however, over-produc¬ 
tion means production beyond the limits of profit-making, it 
often occurs in individual enterprises and industries. Or, if it 
means producing more than people are able to purchase, over¬ 
production has taken place in every period of depression. Vio¬ 
lent fluctuations in the price of producers’ goods, such as steel, 
often presage the coming of a period of crisis and depression, but 
what is the cause of this violent fluctuation in demand and 
price? Since nearly all goods are produced in anticipation of 
market demands in the future, maladjustment, over-develop- 


BUSINESS CYCLES 


243 


ment, and misdirected investment of capital may occur because 
of unwarranted optimism as to future demand and profits, or 
because of marked and unanticipated diminution in demand. 

No simple explanation of such a complicated economic phe¬ 
nomenon as a business cycle seems adequate. A depression is 
always accompanied by a decline in purchasing power. Men 
and women out of work or working part time want food, cloth¬ 
ing, and other necessities and comforts, but they are unable to 
obtain the requisite purchasing power. Producers and mer¬ 
chants have goods to sell. The community has men, machines, 
and materials, but no market for goods. Men and machines 
are idle while people willing to work lack the necessities of life. 
In earlier centuries scarcity was a menace to mankind. Today 
producing more than we seem able to purchase is characteristic 
of a depression. We have, let it be reiterated, the equipment, the 
power, men anxious to get jobs and who want things, but we 
do not find a market or sufficient purchasing power in a depres¬ 
sion. Fundamentally the problem is: How can purchasing power 
be put into the hands of men and women who want things and 
who are willing to work to get the commodities they want? A 
depression, much unemployment, and lack of purchasing power 
go hand in hand. 

Business Forecasting. Inability to foresee economic changes 
is doubtless a major cause of business failures. Ability to dis¬ 
cern with some degree of accuracy coming business trends is a 
prime virtue among the leaders of business. To place business 
forecasting upon a definite scientific basis, as in the forecasting 
of an astronomical event, is not to be anticipated. Business 
forecasting, like predicting weather changes, is extremely diffi¬ 
cult because of the number of variables mvolved. We cannot 
gather all of the factors involved into our barometer. At best, 
business forecasting can only afford certain general indications 
of business trends in the near future. 

Students of business forecasting usually depend upon a con¬ 
sideration of the forces acting in preceding business cycles. 
They also attempt to make allowance for new factors which 
may enter the business situation. Several statistical services 
furnish forecasts of general modifications in business weather. 


244 


ECONOMICS 


Among the services are Babson^s, Brookmire^s, and the Har¬ 
vard Service. Some business enterprises work out special fore¬ 
casting curves for their own industries. In certain cases these 
curves may follow so closely one of the general curves prepared 
by a statistical service that the latter is used. Forecasting 
helps a business to ascertain desirable policies for the near fu¬ 
ture, it assists in stabilizing the particular business, and it makes 
possible a shrewd estimate of sales within the next few months. 
In spite of the difficulties and inaccuracies of forecasting busi¬ 
ness changes, it is superior in the long run to playing hunches. 
The enterpriser who fails to discern in advance the major trends 
in business is headed toward failure. 

Methods of Stabilization. Five important plans for smooth¬ 
ing out the business cycle may be considered. As these plans 
are dealt with elsewhere in this volume, only a brief discussion 
at this point will be necessary. 

1. Provisions for a stable currency would be helpful. Infla¬ 
tion of the currency was chiefly responsible for the conditions 
which led to the severe panic of 1837. During a period of infla¬ 
tion prices rise, profits seem to come easily, the business man is 
optimistic, over-development of certain industries follows, specu¬ 
lation becomes common, and credit is likely to be granted too 
freely. Finally, a crash follows. In a period of depression prices 
fall, profits shrink, and business men are pessimistic. A stable 
currency would go far toward reducing the extreme oscillations 
of the business cycle. 

2. When banks are allowed or stimulated to cooperate in 
times of stress, when reserves may be mobilized as under the 
Federal Reserve System, when interest rates on bank loans are 
adjusted in accord with the fluctuations of the business cycle— 
raised considerably in times of prosperity and of optimism and 
lowered in times of depression and of pessimism—some smooth¬ 
ing out of the curve representing the business cycle will result. 

3. A public works program planned to push the construc¬ 
tion of roads, public buildings, and other governmental enter¬ 
prises in a time of depression, and to reduce the activity in 
public construction in the phase of the cycle called prosperity 
will help to keep business on an even keel. It would increase 


BUSINESS CYCLES 


245 


the demand for products at a time when demand is slack; it 
would place purchasing power in the hands of workers who 
otherwise would be unemployed. These in turn buy goods which 
will stimulate other industries. In a period when industry is 
being stimulated, the withdrawal of the government in a meas¬ 
ure from the field of construction will tend to prevent the exces¬ 
ses of a boom period. 

4. Many industries, by studying market demand, by plan¬ 
ning their work carefully, or by dovetailing industries, have 
accomphshed much in stabilizing the rate of production through 
a period of months and years. 

5. A compulsory unemployment insurance program may be 
devised so as to give added incentives to the managers of indus¬ 
try for the stabilization of business. 

Questions 

1. ^‘Business forecasters have made bad mistakes.’^ Is forecasting, 
therefore, useless? 

2. In what way would accurate business forecasting help a merchant? 
A manufacturer of steel products? 

References 

Edie, L. D., Economics, Ch. 28. 

Edie, L. D., and others, The Stabilization of Business. 

Foster, W. T., and Catchings, W., Business without a Buyer. 

Hardy, C. A., and Cox, G. V., Forecasting Business Conditions. 
Keezer, D. M., Cutler, A. T., and Garfield, F. R., Problem Eco- 
nomics, Ch. 15. 

Lincoln, E. E., Applied Business Finance, Ch. I. 

Mitchell, W. C., Business Cycles. 


CHAPTER XXV 


RISK-TAKING 

All Business Enterprises Take Risks. Life means the daily 
facing of uncertainty; all living things are risk-takers. Every 
business enterprise involves more or less of risk-taking. Prac¬ 
tically all goods are prepared for the market in anticipation of a 
demand. Machines are built and buildings constructed in 
expectation of certain market demands for the products the 
machine and buildings are to aid in producing. Marketable 
goods are made by means of roundabout methods which involve 
time and which tend to increase business hazards. Every busi¬ 
ness man who produces today for sale at a later date faces 
financial uncertainties; he is perforce a speculator. Risks may 
be roughly classified as technological or marketing. The first 
is connected with the destruction of materials or machines, 
of physical property. Fire, flood, earthquake, or tornado may 
destroy crops, buildings, equipment, or materials. Robbers 
may steal property from an individual or a corporation. Acci¬ 
dents may cause breakage. An early or a late frost may ruin a 
growing crop. Strikes, riots, or wars often result in the destruc¬ 
tion of valuable capital goods. 

Marketing risks are connected with forces which cause changes 
in market prices. Changes in the demand for or the supply of a 
particular commodity or fluctuations in price levels may un¬ 
expectedly increase or decrease the selling value of products and 
lead to unusual profits or losses. The longer the time between 
the beginning of the production of an article and its sale to the 
consumer, the greater the element of uncertainty and market 
hazard. Changes in fashion may cause a shrinkage in the market 
value of goods on hand. Losses may result from inventions 
which render a machine, costing a large sum of money to build, 
obsolescent and out of date. 

No two industries are confronted by exactly the same type 
246 


RISK-TAKING 


247 


of hazards. The farmer, planting in the spring for the autumn 
harvest and for sale at a later date, faces the danger of frost, of 
too much rainfall or of a drought, of the attacks of certain 
insects. He takes risk of accidents or of fire losses. His market 
opportunities are affected by the production elsewhere of his 
crops and by changes in the demand for the output of his enter¬ 
prise. The displacement of the horse by the automobile and the 
tractor has suddenly reduced the demand for oats and hay. 
Changes in the diet of multitudes of people have also increased 
financial uncertainties in the farming business. 

The manufacturer of straw hats is affected by the kind of 
summer. If the summer is cold and wet, the demand for straw 
hats is materially reduced and financial losses instead of profits 
may follow. Sudden changes in style may lead to an unusual 
demand for a certain type of hat and unexpectedly reduce the 
demand for other styles. The growing habit of going without 
hats is another factor to be reckoned with. Changes in the 
fashions for women^s garments have adversely affected the 
woolen industry. Governmental action, such as the enactment 
of a tariff measure, may introduce important changes in business 
conditions. The enactment of prohibition had a far-reaching 
effect upon a variety of industries. A war induces very great 
changes in demand and fundamentally modifies conditions under 
which industry is operated. Changes in price levels cause un¬ 
certainty and changes in business opportunities. 

Speculation. Speculation consists in buying or selling or 
withholding goods from the market in the expectation of making 
gains from price changes. Professional speculators are special¬ 
ists in risk-taking. A speculator may be at one time a seller and 
at another time a buyer. He is dealing with the kind of risks 
which arise in the ordinary course of business. Indeed, specula¬ 
tion in commodities, as will be shown later, may reduce certain 
vicissitudes of business and aid in steadying prices over a period 
of weeks or months. A gambler, on the contrary, makes his own 
hazards. He bets that an event will or will not occur. The risk 
the gambler takes is not an ordinary business risk. As there is an 
indistinct line of twilight between day and night, so there is a 
“twilight” zone between gambling and speculation. The pro- 


248 


ECONOMICS 


fessional speculator studies carefully the forces which may 
induce price fluctuations; he is not taking a blind chance. The 
successful speculator forecasts price changes more accurately 
than others. 

Speculation does not ordinarily make or increase risks. ^^The 
speculator concentrates on his shoulders the natural risks of 
production and marketing, and is able to handle the risks effi¬ 
ciently because of his superlative genius for absorbing and 
interpreting market news, and of making forecasts, with scien¬ 
tific accuracy and on a gigantic scale, of the future market needs 
of the consumers of the world.’’ ^ In the great organized prod¬ 
uce markets, such as the wheat and cotton exchanges, the 
tendency of speculators is clearly toward a reduction of price 
fluctuations. When the crop is harvested and is ready for the 
market, the supply thrown on the market tends to be large and 
the price of the commodity tends to take a downward course. 
Then, speculators, large and small, professional and nonprofes¬ 
sional, buy up wheat or cotton and put it in warehouses. Large 
amounts are thus withdrawn from the market. Prices are raised 
as the result of this extra demand for storage purposes. Later, 
as prices again tend to rise because of a scarcity of the supply, 
the speculators gradually begin to place their supplies on the 
market. In this manner the market supply is increased and 
prices are prevented from going to extraordinary heights. The 
tendency of organized speculation in the produce market is 
toward a leveling of prices over a period of time and toward 
an equalization of consumption of the product over the same 
period of time. The speculator creates time utility. If, for ex¬ 
ample, there were no holding back of wheat in the fall, if all 
purchases of wheat were only for immediate consumption pur¬ 
poses, if, in short, there were no speculation in wheat, prices of 
wheat would slump greatly in the fall and much wasteful 
utilization of wheat would follow. In the spring and early sum¬ 
mer following, great scarcity of wheat would be experienced 
and the market price of wheat would skyrocket—a condition 
harmful for producer and consumer. Speculators may perform 
desirable services for the community in steadying prices, in 
1 Edie, L. D., Economics, p. 219. 


RISK-TAKING 


249 


equalizing consumption, and in reducing waste. These services 
are, however, chiefly performed in connection with commodities 
produced irregularly because of seasonal changes. Speculation 
on the stock market does not have quite the same effect in 
leveling prices. It may, indeed, induce fluctuation. Speculation 
may reduce certain risks and it helps to provide a definite mar¬ 
ket for commodities and corporate securities, but its chief effect 
is to take risks from the shoulders of the business man and place 
them on the professional risk-takers. 

Like oil and water, the technical processes of business and 
speculation do not readily mix. The manager interested in pro¬ 
duction and personnel problems wishes to run his industry as 
far as possible on a basis of reasonable and stable profits. The 
speculator is not interested in technical or personnel problems; 
reasonable and regular profits from ordinary business operation 
do not constitute the goal of the speculator. He is a specialist 
in price fluctuations. All programs which tend to stabilize 
prices, regularize business, and iron out abrupt changes in 
demand limit the field for speculative operations. However, 
inventions, new methods of doing work, the stimulation of new 
wants, and the weakening of old desires tend to keep business 
from a static condition. Progress involves risk-taking and 
forecasting future trends. There is apparently a happy medium 
between fixity and extreme speculative fluctuations in the 
economic world. 

The engineer and many business men prefer a stable price 
level or price changes which can be accurately forecast. They 
wish to make reasonable profits because of technical efficiency 
and managerial ability rather than because of the vicissitudes 
of shifting prices. Speculation and attention to the stock ticker 
are corroders of technical and personnel efficiency. Insurance, 
hedging, forecasting, and other devices for reducing or trans¬ 
ferring risks appeal to the engineer and the modern business 
man. 

The Wage Worker Is a Risk-Taker. The active business man 
or the enterpriser and the speculator are not the only ones con¬ 
nected with industry who face financial hazards. The capitalist 
or creditor and the employee also take risks. The investor or 


250 


ECONOMICS 


lender, even in the case of high-grade securities, takes some risk 
even though it may be slight. Government bonds have been 
repudiated. The first-mortgage bonds of well-known companies 
may be seriously affected by some unexpected business vicis¬ 
situde. As long as a debt remains unpaid, there is some risk 
that it will not be paid. The wage worker receives a contractual 
wage; he is sheltered from many of the effects of business un¬ 
certainties; but he is forced to bear risks which are not incon¬ 
siderable—danger of unemployment, of accident, of sickness, 
etc. Changes in technical methods or the invention of new 
machinery may make useless his especial skill. The highly 
specialized worker, as well as specialized machinery, is in con¬ 
stant danger of being displaced or discarded. 

Reduction of Risks. Progress in industrial and marketing 
efficiency calls for the reduction of business hazards and for bet¬ 
ter methods of carrying the burden of such hazards as are not 
eliminated. There are at least three possible courses of action 
which an individual or a corporation confronted with a business 
hazard may follow: (1) certain risks may be eliminated or re¬ 
duced, (2) some may be transferred by organized speculation, 
and (3) others may be transferred or distributed by insurance. 

Certain risks may be eliminated by business forecasting, by 
cost accounting which gives definite knowledge of past costs, 
and by the use of appliances which prevent fire, accidents, sick¬ 
ness, or other dangers. The building of fireproof buildings and 
the maintenance of excellent fire departments will reduce the 
risks from fire. Safeguards for machines and safety-first educa¬ 
tional campaigns will reduce accidents in industrial plants. 
Intelligent forecasting may foreshadow changes in demand or 
in price levels and enable the business man to take steps to 
avoid the losses which the man who follows hunches and rule- 
of-thumb methods will almost inevitably experience. Risks are 
reduced by knowledge. 

Transfer of Risks. One method by means of which the pro¬ 
ducer may transfer certain risks to the middleman or the specu¬ 
lator is that of producing only upon orders. An order is received 
by a corporation producing iron and steel products. The order 
is for a definite amount of a given type and quality at an agreed- 


RISK-TAKING 


251 


upon price. Delivery is expected at a particular future date. 
The manufacturer immediately buys the necessary raw materials 
and proceeds to fill the order. Price fluctuations in the selling 
price of the articles ordered no longer affect the manufacturer. 
The firm placing the order runs the risk of loss and may have 
the opportunity to make speculative profits depending upon 
the trend of prices of the particular article. Sometimes, how¬ 
ever, an order may be cancelled. Wholesale cancellation of or¬ 
ders followed the break in prices in 1921. Risks in connection 
with changes in wages cannot as a rule be shifted in this fashion. 

A second way of shifting risks is by making purchases for 
future delivery. This method is often used in connection with 
commodities bought and sold on the large produce markets. A 
building contractor who has just signed a contract to construct 
at a definite price an apartment house may immediately buy 
such materials and appliances as may be required for delivery 
at future dates. In this manner certain risks connected with 
price fluctuations may be shifted to wholesalers and jobbers of 
materials and equipment. A manufacturer of cotton cloth 
might receive an order for delivery six months later. It may 
not be necessary to buy the cotton to supply this particular 
order for, say, five months. The manufacturer may shift the 
risk of fluctuations in the price of raw cotton by buying a fu¬ 
ture—that is, buying cotton today for delivery five months 
later at a definite price. 

The sale of futures is an organized speculative business on 
certain produce exchanges. The operation of the market for 
futures may be illustrated by the wheat market. One set of 
traders, called in technical jargon “bulls,’' decides as the result 
of a study of crop and market conditions that the price of wheat 
will rise. They buy wheat at today’s prices to be delivered at a 
future date. The bulls on the wheat market expect to make a 
profit through a rise in price enabling them to sell at a higher 
price the wheat which is to be delivered to them, say, three 
months later. Another group of traders, called bears, believe 
that prices are going down instead of up. They sell contracts 
to deliver wheat at a future date. The bears do not have the 
wheat on hand which they have agreed to deliver at the future 


252 


ECONOMICS 


date. They have “sold short/^ and expect to be able to buy 
the necessary amount at a lower price on the market than the 
delivery price calls for. If their calculations are correct, they 
make as a profit on each bushel the difference between the de¬ 
livery price and the market price. In like manner, the bulls 
may gain or lose depending upon the accuracy of their calcula¬ 
tions. The net result of such operations makes for steadier 
wheat prices over the period between harvests. 

Hedging. The practice of buying and selfing futures has 
made possible the practice of hedging, by means of which certain 
enterprisers are able to shift business risks to the shoulders of 
speculators. Hedging consists in buying and selling in the mar¬ 
ket at about the same time so that gains due to a rise in prices 
on one transaction will be balanced by losses on the other. The 
milling industry furnishes an illustration of the use of hedging. 
The selling price of wheat flour fluctuates with changes in the 
price of wheat. The cost of the raw material is a large fraction of 
the production cost of flour. If a miller is converting wheat into 
flour and the price of wheat rises or falls considerably after he 
has purchased the wheat but before it is milled and sold as flour, 
the miller may make extra profits or suffer unexpected losses. 
The miller who does not wish to be a speculator may shift the 
hazards due to price fluctuations by using the hedging process. 

A miller may buy wheat in September which he expects to 
deliver as flour in May. We may assume that he buys the wheat 
for $1.00 per bushel. He expects to sell the flour at a price 
sufficient to pay for the wheat, the milling costs, and the carry¬ 
ing charges, and also allow a reasonable profit. If the price of 
wheat rises by May to $1.10, and assuming that the price of 
flour is likewise raised 10 per cent, the miller receives an 
extraordinary or speculative profit equal to ten cents on each 
bushel of wheat. If he had practiced hedging, he would have 
sold short in September the same number of bushels of wheat 
for May delivery. Since the price of wheat has risen ten cents, 
he will be obliged to pay ten cents more per bushel for wheat in 
May than he would obtain on his contract to deliver. Thus, 
disregarding broker’s fees, he would lose on his future the amount 
of the extraordinary profit gained on the sale of flour. 


RISK-TAKING 


253 


If, on the other hand, the price of wheat had declined ten 
cents per bushel, or to ninety cents, in May, the miller would 
have faced an unexpected drop in the price of flour equal to ten 
cents per bushel of wheat and his ordinary profits would be more 
than wiped out. But, he would gain from his future contract, 
as he could go into the market in May and buy wheat at ten 
cents less than the agreed-upon delivery price. His losses on the 
sale of flour would be equalized by the gain in the future 
transaction. In both cases his profits would be practically 
those of ordinary business in a period of stable prices. 

Insurance. The essential feature of insurance is the pooling, 
or consolidating, of a large group of similar hazards. Every 
individual runs the risk of meeting sickness, accident, or death 
each and every day. Statistics compiled from past experience 
indicate clearly that in a large group of people—for example, 
one million individuals—a certain number may be expected to 
die or to suffer an accident within a given year, but it is not 
possible to predict the particular individuals in this vast multi¬ 
tude who will be affected. Of a million dwelling houses dis¬ 
tributed throughout the United States we may anticipate that 
about so many will be destroyed by fire or by tornado during a 
period of twelve months, but we cannot as accurately designate 
the particular homes which will be destroyed. Insurance is 
built upon the theory of probabilities applied to a large group 
of persons or things. 

Insurance does not eliminate risks and losses. It may stimu¬ 
late activities which will, for example, reduce the danger of 
fire or increase longevity, but directly insurance merely shifts 
the burden of a pecuniary loss from one shoulder to those of a 
large multitude. Insurance not only reduces the intensity of 
the burden, but it also actually changes the character of the 
risk. An insurance policy provides for pajmient in case of loss; 
the risk is transferred. Each one of a large number of insured 
persons pays a definite amount yearly, called a ‘‘premium.’^ 
In case of a fire which destroys a building that has been insured, 
the loss is paid for out of the sum accumulated from the regular 
premium payments made by all the members of the insured 
group. The possibility of a great loss falling upon one person is 


254 


ECONOMICS 


by insurance changed into the certainty that small and regula,r 
losses will be experienced by all insured persons. As was indi¬ 
cated above, the burden of certain risks is carried cooperatively. 
Risks are diffused and individual losses are paid regularly as 
premiums. In this fashion fire insurance, for example, becomes 
a regular and calculable expense of doing business. The same 
fundamental principles which are applied to fire insurance are 
used in life, accident, and all other forms of insurance. In case 
of a new form of risk about which as yet little statistical informa¬ 
tion is at hand, the insurance company is obfiged to fix its 
premium rates somewhat blindly. The usual method is to place 
a very high rate upon such hazards until experience has shown 
that a lower rate is feasible. 

Not all risks are insurable. In cases where there are a large 
number of distinct risks so that a fairly constant average of 
losses is maintained over a period of time, the principles of 
insurance may be applied. The statistics of losses may be 
gathered and average losses determined over a period of years, 
after which it is feasible to develop an insurance program for 
that type of risks. The hazards must be sufficiently common 
that the law of averages may be applied. Until comparatively 
recent times a scientific basis for insurance was not possible. 
In the first place, the gathering and interpreting of statistical 
information was not well organized, and, in the second place, as 
long as wars and pestilences were of frequent occurrence, careful 
calculation of risks was not feasible. 

While insurance seems to have originated as a gamble, life 
and fire insurance companies have such a mass of statistical 
data as to risks that the business has been placed upon a non- 
speculative basis. The insurance company that distributes its 
risks over a wide area so that a great catastrophy in one locality 
will not place upon it such an unusual strain as to bankrupt 
it, is taking little extraordinary risk. Insurable hazards are 
capable of careful calculations. Indeed, the person who refuses 
to insure his home may logically be accused of gambling that a 
fire will not occur on his premises. Adequate insurance has its 
psychological effect of reducing worry; and worry digs many an 
early grave. 


RISK-TAKING 


255 


The origin of modern insurance seems to have been connected 
with certain loans or speculative ventures in connection with 
the voyages of ships in the thirteenth and fourteenth centuries. 
At that time an ocean voyage was a perilous undertaking. If 
the ship and its cargo reached its destination, large profits might 
be made, but many a ship was lost at sea or was captured by 
pirates. Loans were made upon the ship and its cargo. If the 
ship made a successful voyage, the loan was returned with 
interest. If it was lost, the loan was not repaid. In the absence 
of any accurate knowledge as to risks, this procedure amounted 
to betting that the ship would or would not be lost. The first 
fire insurance company organized upon a firmer basis than ran¬ 
dom speculation was formed soon after the Great Fire of Lon¬ 
don in 1666. Life insurance as a business seems to have origin¬ 
ated about a century later. ^ 

From these humble beginnings, practically as a gambling 
proposition, insurance has grown to be one of the large business 
enterprises of today resting upon a solid foundation of accurate 
data as to hazards. Insurance in the United States is subject 
to special governmental regulations in regard to reserves and 
other features of the business. Life and fire insurance consti¬ 
tute the most important forms of insurance, but any form of 
calculable risk may be made the subject of insurance—sickness, 
accident, burglary, tornado, hail, breakage of plate glass win¬ 
dows, etc. Social insurance is a form of compulsory insurance 
for the protection of workers against industrial accidents, sick¬ 
ness, invalidity and old age, and unemployment. This special 
form of insurance will be considered elsewhere. ^ 


Questions 

1. Every business enterprise involves speculation. Explain. 

2. May speculation reduce price fluctuations? Prove. 

3. What is hedging? 

4. What is a ‘‘future”? 

5. Speculation has been called a corroder of efficiency. Why? 

1 Ely, R. T., Outlines of Economics (5th ed.), pp. 641-642. 

2 Chapter XXX. 


256 


ECONOMICS 


References 

Bye, R. T., Principles of Economics, Ch. 10. 

Clark, Fred E., Principles of Marketing, Ch. 17. 
Deibler, F. S., Principles of Economics, Ch. 7. 

Hadley, A. T., Economics, Ch. 4. 

Hardy, C. 0., Bisk and Bisk-Bearing, Chs. 1, 6, and 12. 


CHAPTER XXVI 


POPULATION AND THE INDUSTRIAL PERSONNEL 

The Malthusian Law of Population. An English writer, T. R. 
Malthus, writing in the opening years of the nineteenth cen¬ 
tury, developed a famous ‘Taw of population.” Malthus lived 
in England at a time when poverty was very evident. The 
population apparently had been increasing more rapidly than 
the means of obtaining food and other necessities. It was felt 
that the farming population could not produce enough food 
for “the multiplying numbers which manufacture and urban 
life in general promised to keep busy.” The much-discussed and 
much-criticised Malthusian theory presents a very pessimistic 
outlook for mankind; poverty is assumed to be the inevitable 
fate of the masses of mankind. The population tends to increase 
more rapidly than the means of subsistence. This so-called 
law is a part of the classical economist’s theory that certain 
economic and social changes are inevitable or automatic that 
they are outside or beyond the realms of human control. The 
assumption, now generally held to be untenable, was made 
that the birth rate was uncontrollable. Emphasis was placed 
upon the view that prosperity and high standards of living would 
lead to a rising birth rate and sooner or later result in over¬ 
population and poverty. It was argued that population would 
increase wherever and whenever the means of subsistence in¬ 
creased unless prevented by powerful checks. Malthus did, 
however, recognize certain preventive checks—late marriage, 
control of the passions, etc. The positive checks in early genera¬ 
tions were such dire calamities as famine, pestilence, war, 
cataclysms of nature, and the practice of infanticide. In this 
country and in certain other countries experience since the time 
of Malthus indicates that persons accustomed to a fairly high 
standard of living are likely to delay marriage and to have a 
lower birth rate than those accustomed to a lower standard of 

257 


258 


ECONOMICS 


living. The birth rate and the death rate are subject, within 
broad limits, to modification and control, but the human species 
possesses great potential possibilities for population growth. 

If material progress is to continue, population must increase 
more slowly than the wealth of the group. When the population 
of a given area is very small, there can be little division of labor 
and production per capita is of necessity limited. Our interest 
primarily is centered upon productivity per capita rather than 
upon total productivity. In very densely populated nations the 
point of maximum productivity per person is passed, output 
per capita tends downward, and poverty is the lot of the rank 
and file. If the population of a given area becomes too large, or 
if it becomes too small, the per capita output will tend to de¬ 
crease. There is an optimum of population for a given country 
with a particular development of natural resources, capital, 
skill, and scientific attainment. The optimum of population 
will allow the largest possible per capita productivity, and with 
proper distribution of wealth and income will lead to a high 
degree of comfort. 

Growth of Population. The corner stone of the Malthusian 
theory seems to be true. During the century following Malthus 
the population and the productivity of England and of the 
Western World increased rapidly. In 1800 the total population 
of the world was approximately 850,000,000. In 1930, only one 
hundred and thirty years later, the total was estimated to be 
at least 1,800,000,000, or the population of the world had more 
than doubled. In other words, the world’s population grew 
very slowly up to the end of the eighteenth century. Since the 
opening of the nineteenth century, the rate of population growth 
has been relatively rapid. It has been estimated that the popu¬ 
lation of Europe increased about 35 per cent from 1600 to 1700; 
50 per cent, from 1700 to 1800; and over 125 per cent from 1800 
to 1925. During this latter period about 35,000,000 people 
emigrated from Europe to the United States. The population 
of this country has increased from over 5,000,000 in 1800 to 
approximately 120,000,000 in 1929, but the rate of increase per 
decade is undergoing reduction. From 1900 to 1910 the increase 
was 15 per cent, but from 1850 to 1860 it was 36 per cent. The 


POPULATION AND INDUSTRIAL PERSONNEL 259 


population of the United States is now increasing about 
1,500,000 per year. As a large percentage of the world’s popu¬ 
lation is not, even in recent decades, officially recorded, popula¬ 
tion estimates are liable to exhibit a considerable percentage 
of error. 

The birth rates of nearly all peoples of the Western World 
show a marked tendency downward. According to Pro¬ 
fessor Willcox, the decline in the birth rate of native Americans 
began about 1812. In France the decline started before 1850. 
Nearly all other European countries attained their highest 
birth rates before 1890. The death rate has also been greatly 
reduced. According to Professor East, the daily bulletin of 
world population statistics reads: births, 150,000; deaths, 
100,000.^ The world is gaining in population at the rate of 
50,000 daily. It is estimated by students of population statis¬ 
tics that in 1950 the world population may reach 2,500,000,000 
and that of the United States, 150,000,000. The latter figure 
represents nearly the limit that the country will support under 
our present standards of farming, and there are definite limits 
to our natural resources, such as coal, petroleum, and iron ore. 
Professor East has issued this warning: “The first requisite for 
the convalescence of the sick old world, therefore, is restricted 
population. With it mankind may show a progressive evolution 
of body, mind, and soul; without it the door is shut.” Another 
student of population problems has recently written a book en¬ 
titled Standing Room Only? ^ Jungle, forests, woodland streams, 
solitary places, and wild life begin to disappear as the pressure 
of population gradually becomes felt. Increased effort in get¬ 
ting a living will be necessary, more and more of thought and 
effort will be diverted into the job of getting a food supply, 
greater emphasis will be laid upon frugality, and comforts and 
luxuries will gradually become less and less attainable. With 
steadily increasing population the United States will ere long 
stand at the “crossroads.” The birth rate must be reduced or 
the standard of living lowered. It is, of course, possible that 
science may offer new means of pushing the danger somewhat 

1 East, E. M., Current History, July, 1926. 

2 Ross, E. A. 


260 


ECONOMICS 


into the background for the near future, but sooner or later we 
shall face the problem of declining comfort, unless the popula¬ 
tion becomes stationary. The hope of conquering poverty will 
be futile unless the rising tide of population is halted. 

The American standard of living, with its emphasis upon a 
hving plus, or of “jam on the bread,” is only possible because 
we are still able to produce efficiently. Let the population in¬ 
crease to much greater density and we confront the law of di¬ 
minishing returns. This law cannot be annulled. Sooner or later, 
with steadily increasing population, more and more of our efforts 
will of necessity be directed toward the prosaic job of getting a 
meager living for a large and drab population, facing poverty 
and privation. This is not a pleasant picture to paint, but its 
outlines seem fairly clear and distinct. 

The quality of a population also has certain important eco¬ 
nomic aspects. A prosperous nation, in addition to a reasonable 
density of population, abundant natural resources, good clunate, 
and other physical factors, will be peopled by an alert and 
capable type of people. Prosperity cannot be achieved by a 
group of weaklings or by a defective stock. Under modem 
conditions wars kill off the vigorous and virile, while medical 
science and humanitarian programs tend to preserve the weaker 
who, under the sterner conditions of primitive and pioneer life, 
would have been eliminated. Many neurotic and defective 
persons are allowed to marry and add to the total of this dan¬ 
gerous and undesirable group. As yet few steps have been taken 
in the direction of “negative eugenics.” 

Growth of Cities. Along with the improvement of transporta¬ 
tion facilities, the increasing use of machinery and power, and 
the advances in sanitary and medical science have come the 
rapid growth of urban populations. The cities of ancient and 
medieval times were comparatively small in size and few in 
number. They were unattractive and highly insanitary. The 
death rate in the cities of earlier generations was excessively 
high. Today the typical American is an urban dweller. The 
frontiersman and the farmer are being replaced by the urban 
and suburban type. Practically all of our increase in population 
since the turn of the century has been added to the cities. On 


POPULATION AND INDUSTRIAL PERSONNEL 261 


January 1,1929, the American farm population, as estimated by 
the Federal Bureau of Agricultural Economics, was 27,511,000— 
the least in twenty years. Over one-half of the population of 
the United States now lives in cities and towns of at least 
2,500 inhabitants. The cities of Europe have likewise grown 
with great rapidity since 1800. 

The difficulties of living in cities show indications of increas¬ 
ing in spite of improvement in technical knowledge. The den¬ 
sity of population is excessive in many cities, and, when re¬ 
lieved by the march to the suburbs, the transportation problems 
are multiplied. Urban taxes and cost of living have mounted 
rapidly in the recent decades. Under the surface of important 
city streets is found a bewildering maze of pipes, wires, con¬ 
duits, and sewers. Modern city life is complex and extremely 
interdependent. American cities have nearly all developed in 
a haphazard fashion without a plan for making them beautiful, 
efficient, or livable. We have developed ‘‘no horizontal art of 
city planning.” “The new cities of the Western World are not 
organic centers but inefficient mechanical agglomerations.”^ 

As the population becomes more and more dense, social 
pressure, mass industrial methods, and urban life become of 
greater and greater import. People begin to lose individuality 
and become more and more stereotyped or standardized. In¬ 
stitutionalism, corporation-ism, or group-ism rises higher and 
higher. The independent pioneer, the jack-of-all-trades, neigh¬ 
borhood friendliness, the separate family home, and the family 
gathering around the fireplace in the evening are replaced by 
the city dweller, the specialized worker, the anonymity of the 
large city, the apartment house, and the commercialized amuse¬ 
ment place. 

Immigration. In primitive times groups of men, women, and 
children wandered from place to place in search of hunting 
grounds. Later came invasion, conquest, and colonization. Not 
until comparatively recent times does a movement of men and 
women in a thin stream from one organized community to 
another take place. This form of migration is called “immigra¬ 
tion” in the country to which migrants come, and “emigration” 

^ Chase, S., Men and Machinesf p. 247- 


262 


ECONOMICS 


in the home country which they leave behind. After the period 
of American colonization was ended and the government of the 
United States organized, immigration was insignificant until 
the thirties of last century. The so-called immigration problem 
has appeared as the world population increased. It now seems 
clear that, unless confined by transportation difficulties or legal 
restriction, population tends to move from population centers 
of great density to countries of lower population density and of 
relative abundance of natural resources. 

The United States has been a country of immigration. From 
1820, the year in which our immigration statistics were first 
recorded, to 1925 over 36,000,000 immigrants came to our 
shores. Of this total nearly 11,000,000 came in the last sixteen 
years of the period. As a fraction of this total returned to their 
home lands, the net immigration is less than the figures given 
above. The stream of immigration has not moved with regular¬ 
ity. Roughly speaking, the flood tides of immigration occurred 
in periods of prosperity. The stream usually dwindled as busi¬ 
ness depression appeared. Immigration is a matter of pushes 
and pulls. Bad times and religious or political persecution 
in the home land tend to prod groups and individuals into 
seeking homes and fortunes elsewhere; good times and religious 
and political freedom in other lands draw immigrants to new 
homes. The peak year of immigration into this country was 
1907; in that year over one and one-fourth million immigrants 
were admitted. Before 1880 nearly all immigrants coming to 
the United States came from Northwestern Europe. About 
1890 the sources of the stream of immigration shifted to South¬ 
ern and Eastern Europe. This change was almost coincident 
with the disappearance of free land and the rapid growth of 
factories and cities in this country. The days of the pioneer and 
the backwoods farmer were ended; industry was calling for the 
unskilled worker to do the rough hard work of constructing 
railways, mining coal, and operating machinery in factories. 
In 1907, of that mighty horde of immigrants which sought homes 
in the United States, approximately 75 per cent were from 
Southern and Eastern Europe, but the employers of the opening 
decades of this century were predominately of the older Ameri- 


POPULATION AND INDUSTRIAL PERSONNEL 263 


can type. This differentiation complicated the American labor 
problem; the large influx of immigrants into the wage-earning 
group introduced added elements of friction. The restrictive 
measures of recent years may aid in preventing further accen¬ 
tuation of racial and national differences in the employer- 
employee relationships. 

Although from time to time much antagonism has been 
manifested toward immigrants, our traditional policy has been 
freely to admit aliens wishing to find homes within the borders 
of the nation. Americans were somewhat proud that this 
country was a haven of refuge for the poor and oppressed of 
other lands. The first general immigration law was passed in 
1882. Several additional measures were placed upon the federal 
statute books between 1882 and 1917. In the latter year the 
literacy test was made a prerequisite for admission. The aim of 
the legislation enacted between 1882 and 1917 was selective; 
undesirables were to be denied entrance. Among the excluded 
groups were illiterates, convicts, defectives, persons afflicted 
with contagious diseases, beggars, paupers, persons suffering 
from chronic alcoholism, and contract laborers. Chinese labor¬ 
ers have been excluded since 1882; under a gentlemen’s agree¬ 
ment Japanese laborers were also excluded. The Act of 1917, 
by a “geographic delimitation,” practically excluded all Orien¬ 
tals except Japanese. In 1921 the first quota act was passed. 
Clearly under the quota laws restriction is added to selection. 
The existing selective acts were not repealed, but the number of 
aliens of any nationality lawfully admitted in any year was 
limited to 3 per cent of such nationality already resident in 
the United States, according to the census of 1910. In 1924, 
the second quota law was passed. The quota rate was reduced 
to 2 per cent annually, according to the census of 1890. The 
total number of immigrants to be admitted annually from quota 
countries was between 160,000 and 170,000. The change in the 
census used as a basis for the quota was due to a desire to re¬ 
duce the immigration from Southern and Eastern Europe. 
Orientals not eligible to citizenship were excluded. The native- 
born citizens of Canada, Newfoundland, Cuba, Mexico, and the 
independent countries of Central and South America were not 


264 


ECONOMICS 


included in the quota provisions; only the selective laws apply 
to immigration from Mexico and other independent countries 
of North and South America. In 1929, for the 2 per cent 
quota was substituted a ‘‘national origins’^ quota. The number 
annually admitted from countries covered by the quota legisla¬ 
tion was reduced to approximately 154,000. This change in the 
quota basis decreased the quota of Germany and the Irish Free 
State. It increased considerably the quota of Great Britain. A 
few other minor changes in the quota also resulted from the 
modification of the law. The quota laws have resulted in a 
marked reduction of immigration from Europe and Asia, but 
the immigration from Mexico has increased. The World War 
and the restriction of immigration since 1921 have also induced 
a large migration of Negroes from the South to the industrial 
cities of the North. 

The Restriction of Immigration. Why did the American 
people depart from their traditional immigration policy of 
selection? Three major reasons may be advanced for this strik¬ 
ing modification in public opinion. (1) The American people 
are beginning to realize that the continent is no longer a new 
and unexploited territory into the vast areas of which a large 
flood composed of a mixture of peoples may easily be absorbed. 
Conservation of natural resources and restriction of immigration 
are not unrelated social phenomena. Both are indications that 
our pioneer period is passed. Because of social inertia a genera¬ 
tion elapsed before we became interested in conserving re¬ 
sources and in the population question. Until recent decades 
it seemed to all Americans that this continent was so vast and 
so blessed with resources that it could for centuries be the asy¬ 
lum for the poor, weak, and oppressed of the world. Now, we 
are hearing about the dangers of over-population. (2) In recent 
years authorities have been insisting that more stress should be 
placed upon the importance of heredity. Americans have been 
prone to believe that individuals and groups of people were the 
products chiefly of environmental conditions. The biologists 
and our experience during the World War have resulted in a 
partial revision of this confident judgment. The War made it 
clear that the famous American melting pot was not function- 


POPULATION AND INDUSTRIAL PERSONNEL 265 


ing as we had fondly hoped. Race prejudice, or the feeling in 
favor of comparative homogeneity within a group, is powerful 
but it is not a product of reason. Race prejudice is found in 
practically all parts of the world, and it is old. The Greeks and 
the Egyptians of the Ancient World exhibited racial prejudice. 
Race prejudice is not instinctive; it is largely the result of some 
social menace. The emphasis upon heredity and the intensi¬ 
fication of racial and national prejudice are factors causing the 
trend toward the restriction of immigration. (3) Until the be¬ 
ginning of the World War, the United States obtained its supply 
of unskilled labor in a large measure through immigration. ^‘Up 
to the War, roughly speaking, three-quarters of our unskilled 
mine, mill, factory, and construction labor were bred abroad in 
the environment of autocracy.” ^ While emphasizing the im¬ 
portance of education, we received a large stream of poorly 
educated and trained immigrants. Managers are now substitut¬ 
ing machinery for the unskilled laborer. The editor of a techni¬ 
cal journal has well expressed the view that we no longer need 
to admit a stream of unskilled workers. ‘‘A preponderance of 
crude labor, like a preponderance of wheelbarrows, shovels, and 
other inefficient and primitive tools in a modern factory, is an 
admission of managerial inferiority. . . . Invention has already 
put the wheelbarrow and the shovel out of the running. . . . 
The unskilled laborer is not an asset, but a liability.” ^ 

Is the Restriction of Immigration an International or a 
Domestic Problem? A well-defined conflict of interests between 
countries of immigration and those of emigration may readily 
be discerned. A country of emigration wishes to secure many 
attractive outlets for its surplus population and to retain as 
far as possible a firm political and moral control over the groups 
leaving the home country. The authorities of a nation of emi¬ 
gration often insist upon considering the emigrants as semi¬ 
colonists rather than as immigrants to another country and 
governmental jurisdiction. A country receiving immigrants 
insists upon the right to select such individuals as are held to 
be desirable and to absorb them as soon as possible into the 

1 Gilbert, C. G., and Pogue, J. E., America’s Power Resources, pp. 4, 5. 

2 Industrial Management, November, 1922. 


266 


ECONOMICS 


citizenry of the nation. Emphasis is placed upon the desirability 
of an early and complete break with the country from whence 
the newcomers originate. The United States desires its immi¬ 
grants to cease being hyphenated Americans.^ 

Countries of immigration are prone to insist that the regula¬ 
tion of immigration is a domestic policy; countries of emigra¬ 
tion more willingly accept the view that interference with the 
free flow of people should be a matter of international policy. Is 
it desirable that a nation interfere with international population 
movements or should an open-door policy be adopted? If 
interference becomes the accepted program, in whose interest 
is it to be enforced? Has a land-grabbing people the right to 
erect barriers against the people of an overcrowded area? Is a 
country of dense population, high birth rates, and low standards 
of living justified in demanding an outlet into a region of less 
density of population, lower birth rates, and higher standards 
of living? May a people maintaining a high birth rate justly 
insist that others move more closely together in order to make 
room for their surplus population? Is it reasonable to expect 
the American people, maintaining a fairly high standard of liv¬ 
ing, to adopt the theory that a high birth rate and a dense popu¬ 
lation give the inhabitants of another part of the globe the right 
to migrate to whatsoever portion of the earth the latter may 
desire? If this theory be accepted as a matter of international 
law, will not the standards of living of the entire world tend 
downward toward the level now occupied by certain populous 
nations? The hope of maintaining high standards of living in 
America and elsewhere may conceivably depend upon the erec¬ 
tion of barriers to the free movement of populations. The na¬ 
tions having fairly high standards of living and without great 
density of population cannot be expected to become asylums 
for the surplus populations of densely populated countries. The 
answer of the American people is that immigration restriction 
is a domestic policy; but insistence upon this program may lead 
to serious friction in the not distant future. 

The Nation’s Working Force. On July 1, 1928, the popula¬ 
tion of continental United States was estimated to be 119,- 

1 See article in Edinburgh Review, October, 1925. 


POPULATION AND INDUSTRIAL PERSONNEL 267 


306,000.^ Of this number, 83,600,000 were fifteen years of age 
or over. The gainfully employed were estimated to number 
46,580,000. This army of gainfully employed supports the 
remainder of the population—72,726,000. The census of 1920 
enumerated 8,550,000 women as gainfully employed. This 
number was 21 per cent of the total number of females 
over ten years of age, and it constituted slightly more than 
one-fifth of the total number gainfully employed. The gain¬ 
fully employed are laborers, clerical workers, skilled craftsmen, 
managers, proprietors, the professional group, and personal 
servants of various types. One great group of workers is omitted 
by the census from the list of gainfully employed—the wives 
and mothers who manage their own households are not included. 

The productivity of a nation’s working force depends upon 
the number and characteristics of the individuals, their train¬ 
ing, proper selection, and wise direction under excellent working 
conditions. Productivity also is dependent upon good manage¬ 
rial direction, adequate capital, scientific knowledge, abundant 
and diversified natural resources, good climatic conditions, a 
stable government which conserves and develops natural and 
human resources, and a multitude of other factors. A change 
in the quantity of population does not always mark a corre¬ 
sponding change in the supply of labor. Restriction of immigra¬ 
tion into the United States is tending temporarily to increase 
the number of men and women in the older age classifications. A 
recent study made by a committee of the National Association of 
Manufacturers indicates a shift in the age distribution of workers 
between 1923 and 1928. The figures are based on an analysis of 
1,189,000 workers in 1923, and of 2,632,822 in 1928. The per¬ 
centages in the age groups 16 to 20, and over the age of 40, were 
found to be as follows: ^ 


1928 

7.76 

33.74 


1923 

10.86 

31.88 


16-20 
Over 40 


The Migratory Worker. There are, roughly estimated, be¬ 
tween 1,500,000 and 2,000,000 workers who may be designated 

1 National Bureau of Economic Research. 

2 Monthly Labor Review, May, 1930, p. 56. 


268 


ECONOMICS 


as migratory workers. They are in the main drifting, restless, 
homeless, propertyless men. They work in the harvest fields, 
in fruit orchards, on construction jobs, in lumber camps, and in 
other places where irregular and seasonal demands are made 
for workers. The migratory workers constitute a sort of ‘^flying 
squadron’^ which rushes from place to place doing emergency 
service. We treat them harshly and often bitterly condemn 
this class of laborers. They are rude, impolite and strenuous. 
Their philosophy and that accepted by the average stay-at-home 
property owner of the middle class are very, very dissimilar. 
The migratory worker usually places little emphasis upon prop¬ 
erty rights; he owns little or no property except a few personal 
belongings. 

The migratory workers soon degenerate into the tramp class; 
tramps travel but try to avoid work. The irregular or migratory 
workers and tramps are menaces to organized society, but re¬ 
pression is not an adequate cure for the evil. Many a migratory 
worker is the finished product of irregular employment and 
aimless seeking for a job. He is the inevitable result of irregu¬ 
larity of employment, low wages, and harsh treatment. Op¬ 
portunity for regular work, living wages, sympathetic treatment, 
and an opportunity for home life will reduce the number of men 
drifting into this undesirable group. But until the demand for 
workers on the farm, in the fruit orchards, in construction 
work, and in lumber camps is made fairly regular throughout 
the year, the migratory worker is needed. 

Questions 

1. Do you accept the Malthusian theory of population? Why? 

2. Is an increase in population always and everywhere desirable? Why? 

3. Is restriction of immigration purely a domestic problem? Why? 

4. Is the migratory worker an undesirable citizen? Why? 

References 

Carlton, F. T., History and Problems of Organized Labor, Ch. 12. 

East, E. M., Mankind at the Crossroads. 

Edie, L. D., Economics: Principles and Problems, Ch. 21. 

Fetter, F. A., Economic Principles, Vol. I, Pt. 6. 

Ross, E. A., Standing Room Only? 


CHAPTER XXVII 


ORGANIZED LABOR AND EMPLOYEE 
REPRESENTATION 

Organization. In all walks of life organization is deemed 
necessary to obtain results. A political party represents an 
organization of voters; a fraternal society and a corporation 
are types of organization. Associated activity is the order of 
the day. Workers, like other individuals, form definite and for¬ 
mal groups called labor organizations. The purpose of wage 
workers in thus uniting is to gain higher wages, better working 
conditions, and better treatment while on the job. The union 
tends to give the workers more of independence and of willing¬ 
ness to stand against unfair demands on the part of employers. 
Unionists are not humble, docile, and contrite of spirit. How¬ 
ever, few workers of today hope to become employers or in¬ 
dependent business men. Workers unite to improve their 
status as wage earners. 

Early Labor Conditions. Primitive peoples were hunters and 
fighters. As generations passed, some became herders and 
shepherds and others, agriculturists. The advance of a primi¬ 
tive people from the hunting or the pastoral stage was accom¬ 
panied by revolutionary changes in the home, industrial, mili¬ 
tary, and social life. The character, ideals, customs, beliefs, and 
training of the people suffered gradual, but important, trans¬ 
formations as inevitable results of new work, discipline, and 
experience, which exert silent and constant pressure upon each 
and every member of the primitive tribe or horde. In the agri¬ 
cultural stage constant migration is replaced by relative fixity 
of habitation. Personal property, which is an impediment to a 
pastoral people, becomes a desirable acquisition of the agricul¬ 
turalist. The rude hut is built or improved. Property in land 
begins to emerge and slavery arises. New ideals and customs 
characteristic of an agricultural people slowly displace those 

269 


270 


ECONOMICS 


built up among hunters or herders. A multitude of social, 
political, military, commercial, and religious changes are the 
natural and inevitable results of modifications in the industrial 
life of the people. The progress from slavery to serfdom and 
from serfdom to the modern wage system was preceded by 
changes in the density of population and in the industrial 
methods employed in the community. 

Before the free wage earner appeared on the stage of history, 
slavery or serfdom was the lot of the worker. Slavery and serf¬ 
dom were harsh means of forcing the hunter and fighter, after 
generations of experience, into the ranks of the workers. Labor s 
place in history is definitely marked by the institutions of 
slavery and of serfdom. Only in recent generations, after re¬ 
peated multiplications of the world's productive capabilities, 
has labor been given a place of theoretical equality with mili¬ 
tary service and professional practice. The labor union aims to 
uphold the honor and dignity of labor with the hands, to give 
practical significance to ethical ideals as to manual labor. Prec¬ 
edent and dominant class interests are strong forces acting in 
direct and unceasing opposition to the aims and ideals of the 
labor movement. Precedent assigns labor to a lower social and 
political plane, while progress with the wand of industrial effi¬ 
ciency ever points upward and onward toward release from 
ceaseless toil and social degradation.^ 

Early Labor Organizations in the United States. When the 
colonists from Europe arrived upon this continent, they found 
an undeveloped country with great natural resources and a 
scarcity of capital and of workers. The need for workers was so 
great that slavery, which had disappeared in the home lands, 
was introduced in the case of the Negro, and a temporary bond¬ 
age, indentured service, was used for poor white workers who 
were kidnapped or induced by less objectionable means to come 
to the new country. Wage workers were few in Colonial Amer¬ 
ica. In the last years of the eighteenth century a few local and 
short-lived labor “societies" were formed by printers, cord- 
wainers (shoemakers), and a few other groups of skilled workers. 
A labor society was similar to what is now called a “local." 

1 See the writer’s Education and Industrial Evolution^ pp* 150-151. 


ORGANIZED LABOR 


271 


In the opening years of the nineteenth century a few isolated 
labor societies appeared from time to time. These groups usually 
emphasized benefit features for their members. In the “twen¬ 
ties’^ of last century, organization became more prevalent. In 
the latter part of that decade, in two or three cities, trades’ 
unions appeared. A trades’ union was similar to the city federa¬ 
tion of today. It was the first loose grouping together of locals 
for mutual benefit. Soon the workers who had recently been 
given the right to vote in certain northern states went into 
local politics in New York, Philadelphia, and Boston. The local 
labor parties were soon eliminated and the labor movement came 
to a standstill. About 1833 prices and the cost of fiving began 
to rise very rapidly. The workers of the Atlantic Coast cities 
found that their real wages were much less than formerly. 
Quickly, in many cities and towns, local unions were organized. 
Five national unions, tying the locals of particular trades to¬ 
gether, and even a General Trades’ Union of locals, trades’ 
unions, and national unions were formed. Under the pressure 
of rapidly rising prices working men were temporarily welded 
together in labor organizations. The severe panic of 1837, how¬ 
ever, practically wiped out unionism in the United States. 

During the decade of the forties few traces of labor organiza¬ 
tions are discernible. About 1850 the beginnings of the per¬ 
manent unionism of today appeared. One national union, the 
International Typographical Union, traces its inception to 1850- 
1852. During and immediately following the Civil War labor 
organizations developed and grew in numbers and importance. 
More national unions were organized and another national 
grouping of different unions, called the National Labor Union, 
was formed and lived for several years. The panic of 1873 re¬ 
duced the total union membership and destroyed several na¬ 
tional unions; but, unlike the panic of 1837, it did not entirely 
extinguish American unionism. 

Labor Organizations. The primary unit in a labor organiza¬ 
tion is the local. The local is made up of workers of a craft or 
trade in a given locality, or of all the workers in a factory or 
mine. The former is a trade and the latter an industrial union. 
Each local is a democratic unit. At its regular meetings matters 


272 


ECONOMICS 


of common interest are discussed. The officers usually consist 
of a President, Vice-President, Secretary, and Treasurer. The 
offices of Secretary and Treasurer are often united. There are 
also such standing committees as Finance, Grievance, and Exec¬ 
utive. As a rule, none of these officers are salaried. Certain 
locals, as in the building trades, may have business agents or 
walking delegates who are paid salaries. Their work is in con¬ 
nection with the relations between employer and employee. 
Except in the case of certain recently formed organizations,, 
locals are joined together into a national unit which includes 
all the trades of that industry found in the United States and 
sometimes certain Canadian locals. The International Molders’ 
Union is the national union of molders. It includes locals of 
molders in this country and in Canada. A national union usually 
has a salaried President and a Secretary who devote all their 
working time to the job. One hundred and four of these national 
unions are now loosely affiliated in the American Federation of 
Labor. A small group of national unions, of which the Railway 
Brotherhoods and the Amalgamated Clothing Workers are the 
leading representatives, are not affiliated in the American 
Federation of Labor. 

A union man, therefore, belongs to his local, which is a part 
of a national union, and the latter in turn may be a part of the 
American Federation of Labor. Dues are collected by the local 
and a portion sent on to the national, which in turn pays dues 
to the American Federation of Labor, in proportion to member¬ 
ship. In many national labor organizations the power to declare 
strikes and to determine the attitude toward many policies 
regarding the relations between the union and the employer is 
vested in the central body rather than in the locals. As in the 
government of the nation, the tendency has been to strengthen 
the central body at the expense of local government or organi¬ 
zation. 

The Knights of Labor. The General Trades’ Union of the 
thirties of last century and the National Labor Union of the 
sixties were premature and ephemeral attempts to form a 
federation of local and national unions after the fashion later 
carried out more effectively and permanently by the American 


ORGANIZED LABOR 


273 


Federation of Labor. The most spectacular of all American 
labor organizations is the Knights of Labor, which was organ¬ 
ized in 1869, flashed into power and prestige in the eighties, and 
then went into a rapid decline. The Knights of Labor was at 
first a secret organization. It took into its membership all types 
of workers—unskilled and skilled, professional men, and even 
business men who were sympathetic with the cause of organized 
labor. Trade and craft lines were in a large measure ignored. 
The Knights of Labor was a mass organization which had a 
membership in 1886 of 600,000 to 700,000 members. This con¬ 
glomerate aggregation exhibited little solidarity and could not 
be long held together as a stable organization. As it declined, 
the American Federation of Labor, which recognized the im¬ 
portance of craft lines, grew in power, prestige, and member¬ 
ship. 

The American Federation of Labor. The American Federa¬ 
tion of Labor was organized under a different name in 1881; 
it assumed its present name and form in 1886. The Federation, 
unlike the Knights of Labor, is a loose federation of unions; it 
is a union of unions. A union bricklayer, for example, belongs 
only indirectly, through his local and his national union, to the 
American Federation of Labor. The Federation in 1930 was 
composed of 104 national unions which included 29,226 locals, 
49 state federations of labor, 804 city federations, 4 depart¬ 
ments, and 348 ‘‘local trade and federal labor unions’’ not yet 
affiliated with a national union. The control of the American 
Federation of Labor is practically vested in the national unions. 
Nearly all of the votes at the annual convention are cast by 
representatives of these bodies. The Federation is primarily 
an advisory body. The national unions are self-governing. The 
American Federation of Labor cannot call a strike; it cannot 
determine the policies and methods of the affiliated nationals. 
It does try to settle disputes between unions and to get legisla¬ 
tion passed or defeated. It helps in the work of organization 
and of spreading propaganda in favor of organized labor. 

The official membership of the American Federation of Labor 
is equal to the number of unionists in the national unions and in 
the local trade and federal labor unions for whom a per capita 


274 


ECONOMICS 


tax is paid into the treasury of the Federation. Members on a 
strike are not counted because dues are not demanded from 
strikers. Some national unions may dodge paying the per 
capita tax on new members and some nationals appear to report 
and pay the per capita tax on a fixed number year after year. 
According to the official figures, the membership of the Ameri¬ 
can Federation of Labor passed the half-million mark in 1900, 
the million mark in 1902, and surpassed one million six hundred 
thousand in 1904. Then followed a period of marking time. 
Not until 1911 was the 1904 membership equaled. The high- 
watermark to date, of four millions, was reached in 1920. In 1926 
the reported membership was reduced to 2,803,966; in 1930, 
it was 2,961,096. A small fraction of this membership is located 
in Canada. The total membership of labor organized in the 
United States, including such unions as are not affiliated in the 
American Federation of Labor (in 1930), may be conservatively 
estimated to be less than four millions. A much smaller per¬ 
centage of the total number of wage workers are members of 
labor organizations than is the case in several European nations, 
Australia, and New Zealand. In the United States unionism is 
fairly strong in the building trades, printing, certain parts of 
the clothing industry, railway transportation service, and in a 
few other lines of skilled service. American unionism is weak, or 
non-existent in steel, oil, textile, food, automobile, metal trades, 
rubber, and retail service. Until 1929 little attention was paid 
to organizing the workers of the South. Efforts to attract 
women workers and youthful workers into labor organizations 
have been half-hearted. On the other hand, about one and 
three-quarter million workers were included (1929) in employee 
representation plans. American unionism seems to be marking 
time in regard to membership, percentage, and enthusiasm. 

The American Federation of Labor is not a revolutionary 
organization; it is not interested in overthrowing the present 
political or industrial order. The Federation and its affiliated 
national bodies practice ^‘business’’ unionism. They advocate 
collective bargaining with the strike and boycott as weapons to 
be used if an agreement cannot be reached. The leaders of the 
Federation have been somewhat proud of their step-by-step 


ORGANIZED LABOR 


275 


or opportunist policies which, they confidently assert, have led 
to a higher level of wages and better working conditions. This 
method is held to be superior to the more definite and distinct 
goal of radical groups. Selected by the delegates to the annual 
convention, the officials of the Federation are usually reelected 
year after year. With the exception of one year, Samuel 
Gompers was the president from 1886 until his death in 1924. 
William Green, then a Vice President, became President and 
continues to hold that office. Frank Morrison has been Sec¬ 
retary of the Federation for a long term of years. The annual 
convention is controlled by a group of well-paid officials who 
look and act like business men. 

The Industrial Workers of the World. This is a labor organi¬ 
zation frankly committed to revolutionary aims and methods. 
Organized in 1905, its membership has always been numer¬ 
ically small and unstable. While its leaders have hoped to draw 
workers, skilled and unskilled, into its ranks, its chief appeal 
has been to the drifting or migratory worker of the harvest 
fields, construction work, and the lumber camps. The radical, 
restless, propertyless, homeless, and voteless are attracted by 
an organization which promises a revolution soon which will 
overthrow the present order and establish some sort of Utopia 
for the rank and file of workers. As its name indicates, the craft 
form of organization is rejected. According to the philosophy 
of these radicals, a labor organization should include in a com¬ 
pact group all the workers employed in a particular ship, mine, 
or store. These local groupings of workers would then be tied 
together into departments, these in turn to be subordinate to 
the central organization chosen by the entire membership. 

The Industrial Workers of the World do not believe in going 
into politics; they would strike at the ballot box with an axe.” 
The organization is not willing to make agreements with em¬ 
ployers. The middle class is held by these radicals to be a na¬ 
tional “pestilence.” Practically all that the American middle 
class cherishes is derided by the followers of the Industrial 
Workers of the World and also by the Communist group. They 
are not adverse to the use of violence. Frequent short strikes, 
interspersed with a skillful sabotage, are advocated for the pur- 


276 


ECONOMICS 


pose of harassing the employer. The general strike that would 
tie up all industrial activity is also a weapon favored by the 
left-wing unionists. The members of the Workers’ (Communist) 
Party are as bitter in their denunciation of the present order 
as the Industrial Workers of the World, but they have organized 
a party and usually try to ^‘bore from within” the existing 
unions instead of forming a separate organization that is, 
they endeavor to get control of locals or of national unions now 
organized. 

Demands and Methods of Labor Organizations. A labor 
union is a means to an end. It is formed and supported by wage 
workers in order to obtain higher wages, a shorter working day, 
and better working conditions. Collective bargaining is the 
prime aim of a labor organization. By collective bargaining is 
meant the bargaining as to wages and working conditions, for 
a group of union men, by representatives of the workers. The 
individual and unorganized worker is clearly at a disadvantage 
in bargaining with an employment manager of a large corpo¬ 
ration. A union official may have greater knowledge of the labor 
market. He cannot be fired by the employer, and, if an agree¬ 
ment is not reached, a number of workers will walk out, inter¬ 
fering with the work of the factory. The strike and the boycott 
are weapons which the union uses in case a collective bargain 
or agreement cannot be reached. The collective agreement 
fixes the conditions under which union workers will accept 
employment for the next year or more. 

Union workers often make many arbitrary and unreasonable 
demands, precisely as do many employers. These arbitrary 
demands are fundamentally due to a fear that workers will 
work themselves out of jobs or that the union will be weakened 
unless it adopts these protective measures. Some union men, 
and others, go slowly or restrict output to piece out a job in 
industry in which work is irregular and in which there is much 
temporary unemployment. A shop closed to non-union men is 
sometimes demanded to prevent an employer cutting wages 
in a piecemeal fashion—nibbling the wages. Unions fight unions 
in regard to jurisdiction over certain kinds of work in order 
that the winning organization may be assured of more work 


ORGANIZED LABOR 


277 


and prestige for its members. An analysis of the reasons for 
many of the irritating union demands and usages will disclose a 
fear of loss of jobs and of income. Unionism is likely to be at 
its worst in irregular industries and in plants whose managers 
are arbitrary and unsympathetic in their relations with the 
rank and file of workers under their guidance. 

A strike is a concerted refusal of wage workers to work until 
certain demands are complied with. The strikers consider the 
vacated jobs as their jobs. The strike is warfare in the industrial 
field. A modern substitute for the strike and the boycott is the 
trade agreement and arbitration. The trade agreement is a 
collective bargain made between an employer or group of em¬ 
ployers and the representatives of a union or of a group of unions. 
In the stove industry a definite trade-agreement system has 
been used since 1891. In the clothing industry the system has 
operated very well for several years. The Baltimore and Ohio 
Railway plan, used also by other railways, is an agreement be¬ 
tween the railway and a group of unions composed of men work¬ 
ing in the railway shops. This plan has little to do with griev¬ 
ances; it is a cooperative plan providing for regularization of 
the work in the shops, for higher wages, and for more efficient 
work. The formal agreement is an example of constitutionalism 
in industrial relations. In case of a dispute as to the application 
of the terms of the agreement in a specific case, provisions are 
usually made for consideration of the matter by an impartial 
arbitrator. 

If an agreement as to the terms of the labor contract cannot 
be reached, instead of resorting to industrial warfare, the in¬ 
terested parties may be persuaded to use a process similar to 
the court system, called “ arbitration.’’ Arguments are presented 
by representatives of the workers and of the employers in re¬ 
gard to the reasons for and against any change in wages, work¬ 
ing hours, or other conditions of employment. The Board of 
Arbitration should analyze and weigh the arguments and 
facts presented and finally make a decision as to the terms of 
the new labor contract in the particular case. These awards 
usually are intended to extend over a period of from one to 
three years. There are two distinct types of arbitration: (1) to 


278 


ECONOMICS 


determine the terms of a trade agreement, and (2) to determine 
the application or significance of the terms of a trade agreement. 
The trade agreement and arbitration will lead to a demand 
for the facts in regard to the industry concerned. Uniform 
bookkeeping and more efficient management are likely to be 
demanded by the workers. They will begin to insist that the 
consequences of bad business management shall not be shifted 
to them in the form of low wages. 

Employers* Associations. Employers and business men form 
a great variety of associations, but an employers’ association is 
technically one which deals primarily with the relations between 
employers and their employees. In many respects these asso¬ 
ciations bear a resemblance to labor organizations. A city 
employers’ association such as the Associated Employers of 
Indianapolis, a national organization of which the National 
Founders’ Association is an example, and a federation of asso¬ 
ciations, such as the National Industrial Conference Board, 
which is chiefiy devoted to fact-finding and the dissemination 
of information regarding working conditions, are comparable 
to corresponding groups in the field of organized labor. Certain 
employers’ associations are opposed to organized labor and re¬ 
fuse to deal with its representatives or to recognize a union. 
The National Association of Manufacturers is of this variety. 
Others will recognize organized labor and make collective bar¬ 
gains. The Manufacturers’ Protective and Development Asso¬ 
ciation, formerly called the Stove Founders’ National Defense 
Association, is an example of the second variety of employers’ 
associations. It has successfully bargained with the Interna¬ 
tional Molders’ Union since 1891. 

As an illustration of the parallelism between organized labor 
and employers’ associations, it may be pointed out that the 
unionist feels that the non-unionist is a parasite since he refuses 
to help carry on the struggle to better working conditions. 
Likewise, an employers’ association declares that ‘‘non-members 
of the association are evading an individual civic responsibility 
in their failure to help share the burden” of maintaining the 
organization which is a “bulwark of strength” against the de¬ 
mands of labor. The weapons used by employers’ associations 


ORGANIZED LABOR 


279 


that are hostile to organized labor are similar to those used by- 
militant labor organizations. The organized employers use the 
lockout, the blacklist, and spies, while labor resorts to the 
strike, the boycott, and picketing. Employers' associations, as 
well as labor unionists, lobby in an endeavor to obtain favorable 
legislation or to block passage of laws believed to be inimical to 
the cause they represent. 

Employee Representation. The shop committee, works 
council, employee representation, or industrial representation, 
is a plan by means of which the employee is given, by the em¬ 
ployer, some voice in regard to working conditions, some partici¬ 
pation in the control of the shop. The prime purpose seems to 
be to get teamwork, to reduce unrest, and to bridge the gap 
between labor and management. Another reason for the organ¬ 
ization of an employee-representation plan has been to supplant 
or to forestall the unions. Employee representation is a means 
to an end, industrial peace and efficiency; it is not an end in 
itself. The plan is not a substitute for good management; in the 
hands of an excellent personnel administrator, it may be made 
a desirable means of directing man-power. 

History of the Employee-Representation Movement in the 
United States. The first example of the use of a shop committee 
without connection with a union seems to have been in the 
Filene store in Boston. It began as an insurance committee and 
has gradually increased its functions and powers. The Filene 
Cooperative Association of today may be traced back to this 
humble beginning in 1898. In 1903 the Nernst Lamp Company 
of Pittsburgh established a shop committee. The American 
Rolling Mill Company, in 1904, initiated an ^‘advisory com¬ 
mittee" plan, and, in 1907, the Nelson Valve Company of 
Philadelphia experimented with a shop committee. Of these 
three attempts, the second only is now in existence. In 1911 the 
Mitten plan on the Philadelphia Rapid Transit Company was 
inaugurated. Also, in 1911, the Hart, Schaffner, and Marx plan 
utilizing a union shop committee was adopted. In 1912 the 
Packard Piano Company of Fort Wayne adopted the Leitch, or 
governmental, plan of employee representation. Three years 
later the initiation of the Rockefeller plan by the Colorado Fuel 


280 


ECONOMICS 


and Iron Company marked the first use of the shop committee 
by a large corporation. 

During the World War many works committees were es¬ 
tablished under the guidance of the National War Labor Board. 
A considerable number of companies in 1918, 1919, and 1920, 
harassed by the growing independence of workers and by the 
failure of the old methods of discipline, adopted personnel 
management, employee representation, welfare work, house 
organs, profit sharing, or other schemes in a frantic endeavor to 
reduce labor turnover and to increase the efficiency of their 
plants. When the crisis of 1921 occurred, many of the plants 
whose managers considered these “newfangled” plans only as 
temporary expedients to meet a bad situation, scrapped them 
and returned to the old-fashioned methods of keeping “labor 
in its place.” House organs were discontinued, welfare plans 
were abandoned, personnel departments were discarded, and 
shop committees were shorn of their powers or discontinued. 
However, a considerable number of personnel departments and 
of employee-representation plans weathered the storm. The 
movement is now on a firmer footing and bids fair to grow more 
gradually, but certainly. It was estimated in 1926 that one to 
one and one-half million workers employed by over five hundred 
companies were participating in non-union employee-representa¬ 
tion plans. Another estimate is that, in 1928, about 1,700,000 
employees were under some form of the shop-committee system. 
There is little indication that small concerns employing less 
than two hundred workers will utilize formal shop-committee 
methods. In 1926 employee-representation was especially im¬ 
portant in public utility companies. 

Employee Representation and the Union. As usually organ¬ 
ized, employee representation, or the shop committee, constitutes 
a “company union” of all the employees of a plant. Primarily, 
a shop committee is a one-plant affair, although it is practicable 
to form a federation of shop committees. The problems of the 
shop committee as organized at the present time are chiefly 
local; and, furthermore, it possesses all the weaknesses of a local 
union without national affiliations. To its membership repre¬ 
sentatives of the management are often admitted; it then be- 


ORGANIZED LABOR 


281 


comes a joint committee. The shop committee gives workers an 
insight into plant problems they cannot otherwise obtain, and it 
affords the management an idea of the workers’ point of view 
and difficulties. A properly organized and recognized shop com¬ 
mittee makes for mutual understanding, for teamwork. Under 
this plan the interpretation of an agreement is placed in the 
hands of local men familiar with the details of the situation. If 
plant quarrels are ended, the sphere of action of walking dele¬ 
gates and outside agitators is greatly reduced. Ordinary union 
meetings are usually not well attended. Consequently radicals 
and malcontents often gain the upper hand. Shop committee 
meetings held in the shop—the natural place for a union meeting 
—will draw a good attendance. The necessity for holding union 
meetings outside the shop emphasizes the fighting character of 
the typical union, for which character employers are largely 
responsible. 

The shop committee initiated, fostered, and directed by the 
employing group cannot be a potent instrument in the hands 
of workers. It is local and employer-dominated. Not until the 
shop committee gets away from employer-control and begins 
to take on the essential features of unionism—independence 
and ability to paddle its own canoe—can it be expected to 
become a potent factor in the evolution of industrial democ¬ 
racy. As a coercive agent, the shop committee is weak. If the 
employer continues to feel that it is necessary to combat labor, 
the shop committee is practically useless. Under this system 
the workers are deprived of the services of outside experts. A 
local shop-committee agreement has little or no effect upon 
equalizing wages and competitive conditions in other parts of 
the industry. A national union making a trade agreement is 
ordinarily able to spread the terms of the agreement without 
significant modifications over a large fraction or all of the in¬ 
dustry. One employing concern will know his competitors under 
the agreement are paying the same wage scales. The “fair” em¬ 
ployer is protected against his “unfair” competitor. However, 
the “fair” plant with a good shop-committee system may achieve 
such a high grade of efl&ciency and teamwork that it need not 
fear the “unfair” employer who aims to keep labor “in its place.” 


282 


ECONOMICS 


If employee representation is worth anything as a part of a 
personnel program, it must be entered into as a straightforward 
scheme for bringing into existence industrial peace and har¬ 
mony. If it be fostered by employers as a subtle way of destroy¬ 
ing the efficacy of labor organizations and of making the workers 
subservient while hugging the shadow of power, the employee- 
representation system will in the long run avail little. But, if 
initiated as an honest effort to introduce teamwork, interest, and 
enthusiasm into a common enterprise, the shop committee has 
great possibilities in improving the efficiency of production 
methods and in the modification of industrial management and 
control. Employee representation involves the principle of 
consultation. The workers are to be consulted as to working 
conditions. Clearly, the workers are interested in management. 
Bad management usually means low wages, poor working con¬ 
ditions, undesirable human relations within the shop. The 
rank and file of workers are anxious to place authority for 
management in the hands of those who know what to do and 
how to do it. A successful employee-representation plan will 
have incorporated into its rules of procedure (a) the principle 
that representatives of the employer and of the workers will 
have definite opportunities for formal conferences, (b) a method 
by means of which the employees may freely and without dic¬ 
tation or interference choose their own representatives, and 
(c) a promise, which must be strictly adhered to, that a repre¬ 
sentative of the workers will not be discriminated against be¬ 
cause of his activities as a member of the shop committee.^ 

Is it possible to amalgamate shop committees and unions? An 
affirmative answer may be returned if (1) the union can be 
divested of its extreme belligerency, and if (2) the shop com¬ 
mittee can be shorn of its dependence upon the will and pleasure 
of the management. Professor Commons has been quoted as 
declaring that ^‘a union’s purpose is necessarily and designedly 
restrictive.” It is intended to tie the hands of the employer. 
May we not, however, with reason anticipate that a union 
faced by employers who are not actively opposing it will change 
its methods and ethics? Surely, no one will contend that busi- 
1 Carver, A. H., Personnel and Labor Problems in the Packing Industry. 


ORGANIZED LABOR 


283 


ness ethics do not change with the passage of the years and with 
varying business conditions. Is it not reasonable to expect 
significant changes in the case of labor organizations, provided 
the conditions essential for survival and success are modified? 
The experience of the Baltimore and Ohio Railway with its 
union shop committee, the success of the trade-agreement 
scheme in the clothing industry, and the policy of the printing 
pressmen in employing experts for the purpose of improving the 
presswork in printing establishments employing union pressmen 
point definitely to the conclusion that certain unions, when no 
longer obliged to fight for recognition and for their existence, 
begin to acquire a fundamentally constructive attitude toward 
industry, and to emphasize efficiency and workman-like qualities. 

Opposition to Shop Committees. Active opposition to the 
organization of shop committees arises chiefly within the ranks 
of organized labor. It is believed, not without reason, that 
employee representation is being used by anti-union employers 
to break the strength of organized labor. Doubtless a portion 
of this opposition is due to the fear of union ofiicials that the 
shop-committee plan of organization runs counter to the cus¬ 
tomary form of labor organization and will eventually under¬ 
mine the position and prestige of the leaders of the orthodox 
type of unions. In the second place, it is urged that the shop 
committee, stressing local organization and purely local prob¬ 
lems, is of necessity a weak form of association. It cannot 
possess significant economic power. Thirdly, the shop-commit¬ 
tee plan, as a rule, does not permit the choice of representatives 
from outside the plant. Consequently, the members of a shop 
committee are all chastened in spirit by the ever-present fear 
of losing their jobs. There are examples, however, of outsiders 
being selected as spokesmen by shop committees. In the fourth 
place, unionists and union leaders are accustomed to think in 
terms of conflict when considering relations between manage¬ 
ment and men. They are inclined to look with disapproval upon 
a plan which stresses the constructive rather than the militant 
side of industrial relations. 

If personnel management and employee representation pre¬ 
vented, reduced, or eliminated much of the friction in connec- 


284 


ECONOMICS 


tion with human relations within the plant, it seems clear that 
there would be little demand for outside union officials to inter¬ 
fere in shop matters. Shop quarrels make excuses for the activ¬ 
ities in local matters of union officials. The proper functioning 
of shop committees and of personnel management would allow 
the business agent and the national officer to devote their 
attention to the field outside the scope of the local shop. Em¬ 
ployee representation has been getting as much, or more, for the 
worker in recent times as the union. Of course the union in the 
background may be a potent cause of the fair success of em¬ 
ployee representation. Indeed, shop committees may in time 
become powerful and potent factors in industrial relations. 
It will not be a simple matter to do away with employee repre¬ 
sentation after workers have become accustomed to the system. 

The Outlook for American Labor Organizations. Among the 
many factors upon which the immediate future of unionism 
in America may depend, two seem especially worthy of em¬ 
phasis: (1) the appearance since 1919 of a new type of industrial 
management, and (2) the adoption of a new theory of wages by 
the American Federation of Labor. 

What are the chief characteristics of the newer management 
methods? (a) Up-to-date management is attempting to gain 
the good will of workers. It is using finesse rather than the old 
drive methods based upon fear, and it is stressing the existence 
of certain common interests between management and men. 
On the other hand, radical groups of workers are ever reiterating 
vociferously that the attitude of management toward workers is 
only a subtle means of controlling them. 

(6) Management has been studying, with considerable suc¬ 
cess, methods of reducing labor turnover. 

(c) Management is adopting new methods of selecting and 
promoting workers. Much unrest among industrial workers has 
been caused by the improper and careless adjustment of workers 
to their work. The absence of a worth-while plan of promotion 
has also been a frequent and potent source of industrial friction. 
A definite program by means of which meritorious workers are 
promoted is like oil on a bearing. It makes for industrial peace 
and for teamwork. 


ORGANIZED LABOR 


285 


{d) The new type of management aims to give workers in¬ 
creased security on the job. Regularization of industry will tend 
to reduce, and even to eliminate, the sort of restriction of output 
caused by the ever-present fear workers have felt that efficiency 
usually meant working themselves out of a job and into the 
unemployed group. Progress toward industrial good will and 
industrial peace will depend in no small measure upon the in¬ 
creasing acceptance of the program of the new type of manage¬ 
ment. It is clear that some variety of employee organization will 
be formed. A group system in industrial organization and con¬ 
trol is here to stay. To get things done where large numbers are 
concerned, organization is essential. Either some form of em¬ 
ployee representation or some type of unionism, or both, will be 
found in industry. Many employees are finding it easier to get 
along with shop committees than without, but nearly all em¬ 
ployers prefer to get along without unions. 

Rarely has management tried to develop or bring to the sur¬ 
face whatever good points unionism may possess. Too often 
management has assumed that unions are undesirable and has 
openly or stealthily tried to weaken such organizations. Em¬ 
ployers have as a rule preferred to fight unions instead of es¬ 
tablishing relationships which pave the way for cooperative 
endeavor. As a consequence of being forced to struggle for their 
continued existence, labor organizations have developed un¬ 
desirable qualities which make for difficulty in peaceful nego¬ 
tiations and in teamwork. The results obtained under the 
Baltimore and Ohio Railway plan, in the men’s clothing indus¬ 
try, and in the case of a paper manufacturing company in 
Wisconsin indicate that it is not difficult to substitute good 
will between management and organized labor for industrial 
warfare or an armed truce, provided the management be intel¬ 
ligent and fair-minded. 

One of the big, and often neglected, problems of management 
engineering is connected with the direction and utilization of 
groups of workers. In the past a union has been a fighting or¬ 
ganization aiming at restricting and harassing management. An 
engineering problem of today is that of helping to change the re¬ 
lation between management and men from antagonism and sus- 


286 


ECONOMICS 


picion to that of cooperation and of teamwork. Some professional 
management engineers are beginning to see that it is one of their 
functions to foster and encourage labor groups and to develop a 
technique for such organizations so that workers and their or¬ 
ganizations may contribute in a notable fashion to industrial 
processes. 

American industrial methods call for an unusual amount of 
cooperation and teamwork among and within business units. 
The individual initiative of the craftsman is no longer as impor¬ 
tant as the ability to fit into an organization and work with 
others with a minimum of friction or waste. The high-grade 
executive of today must have highly developed the faculty of 
getting others to work with him; he inspires his coworkers to 
do teamwork; he develops good will and service. Dense popula¬ 
tion, large-scale industry, machinery and standardization—all 
make for the qualities which are essential in the harmonious 
functioning of large groups. 

A forward glance indicates that the future of unionism is 
closely connected with the future of management. If manage¬ 
ment takes the professional point of view, if there is a tendency 
to accept reasonable and stable dividends on the capital stock 
as a goal instead of speculative profits, if the view that high 
wages should be paid prevails, if excellent personnel methods 
are used, then, and then only, may we confidently expect a 
considerable change in methods and programs of organized 
labor, or labor’s temporary eclipse. 

The attention may now be turned to the wage theories of 
the American Federation of Labor. In the past organized 
labor has struggled to obtain an increasing fraction of the 
output of industry without giving consideration to the total 
out of which the fraction is to be taken. Fortunately, since 
the War, organized labor has been slowly moving toward a 
point of view which will enable it to join forces with the in¬ 
dustrial engineer. It is now not impossible to assume that 
militancy in labor unions can be replaced by interest in pro¬ 
ductivity and in efficiency. Organized labor is now beginning 
to stress the importance of increasing output and of reducing 
waste in order that the amount produced may be made larger 


ORGANIZED LABOR 


287 


and that labor’s share may become greater even though its 
fraction of the total remains unchanged. American labor or¬ 
ganizations are in the process of accepting a theory of wages 
which rests upon the principle that real wages should in¬ 
crease with productivity. After the idea is accepted that real 
wages are not unrelated to productivity, it is not a long step to 
the notion that inefficient management and output-restricting 
management and ownership reduce productivity. This theory 
of wages inevitably causes the wage-earning group to become 
interested in management. 

A significant recommendation in regard to wages was adopted 
by the American Federation of Labor in 1925. The Federation 
officially declared that ‘Hhe best interests of wage workers as 
well as the whole social group are served” by increasing the 
quantity and quality of production and by the maintenance of 
‘ffiigh wage standards which assure sustained purchasing power 
to the workers.” As a consequence, “higher national standards” 
will be assured and the workers will enjoy a larger measure of 
cultural opportunities. From which it follows that increased 
wages do not necessarily come out of profits. The acceptance 
of this theory of wages puts a new aspect upon such practices as 
restriction of output and opposition to scientific management. 
The practice of arbitrarily restricting output is beginning to be 
looked upon as inimical to the interests of labor. The production 
of commodities is now recognized to be a group undertaking 
requiring teamwork. The general acceptance of this theory is 
interfered with by irregularity of work and the displacement of 
workers by machines and new processes. The directors of mass 
production enterprises are also clearly discerning the desirability 
of high and regular wages in order to maintain adequate market 
opportunities for such industries. Certainly if organized labor is 
to be interested in productivity, it must be made clear that in¬ 
creased output will not cause the workers to work themselves 
out of a job—as apparently happened in 1921. The coordination 
of productivity and purchasing power is the big problem for 
management as well as for organized labor. These new points 
of view focus the attention upon productivity and purchasing 
power rather than upon the division of the results of productiv- 


288 


ECONOMICS 


ity into wages, profits, and rent. Stress is laid upon productive 
teamwork instead of upon militant activities in dividing the 
spoils. 

Workers are beginning to understand that low wages are often 
paid because of bad management, because a good cost account¬ 
ing system is not used. Labor is objecting to bearing the burden, 
in low wages and long hours, of inefficiency of management. 
With increasing use of cost accounting, publicity as to the facts 
disclosed by studies of costs, and improved management, cer¬ 
tain causes of friction and suspicion are greatly reduced. Labor 
groups do not desire to insist upon demands that will actually 
weaken and destroy the industry from which they are deriving 
an income. It is not improbable that instead of wishing to 
increase inefficiency and to cause revolutionary changes in in¬ 
dustrial control and operation the workers may become inter¬ 
ested in industrial improvements and in stabilization of indus¬ 
try. Union leaders who support the new American Federation of 
Labor program cannot logically stand against the introduction 
of machinery and of scientific management. 

Again, business management, aided by important technical 
inventions, is now greatly concerned with marketing problems. 
Are the masses of the people able to purchase the great flow of 
commodities coming from our large-scale plants? High and 
steady wages place such purchasing power in their hands. The 
short working day and the five-day week are plans which aid 
in stimulating wants and purchases, unless purchasing power 
is lacking. Industries which are over-expanded do not look with 
disfavor upon policies which will increase purchasing power. 
Certain traditional elements of friction in the relations between 
management and men have almost disappeared in the light of 
the new industrial day of enormous productive capacity. Will 
new battlefields appear as labor^s interest in productive efll- 
ciency develops? 

In addition to the influence of a new type of management 
and of a new theory of wages and of purchasing power, it may 
not be irrelevant to allude to a few other factors affecting labor 
relations. The great increase in per capita productivity in the 
last decade, the increase in comfort, the dawning of the bright 


ORGANIZED LABOR 


289 


hope that destitution may be banished from the Western 
World—all point toward a reduction of group friction, toward 
a less clear-cut clash of interest and classes. Furthermore, busi¬ 
ness unionism of the step-by-step variety, of which the American 
Federation of Labor is a fine example, is almost devoid of 
idealism. To reach and inspire the young in a period of rela¬ 
tive comfort in which bread and butter seem assured, it is 
necessary to appeal to some great and attractive cause or 
aspiration. Mere opportunism does not inspire a comfortable 
people to rally around a common standard with zeal and enthu¬ 
siasm. 

The extraordinarily rapid changes in the technique of indus¬ 
try, in methods of transportation and of communication, in 
ownership of property and of property rights, and in living 
conditions are putting their impress upon labor and labor 
movements as well as upon other aspects of American life and 
thought. Technical advances are causes of revolutionary social 
and industrial changes. Growing complexity is characteristic 
of American civilization. How to cope successfully with an 
alien and intricate industrial and social world is our problem. 
Organizations and movements molded under earlier, simpler, 
and less cooperative circumstances must adjust to new condi¬ 
tions or weaken and finally disappear. If this analysis be rea¬ 
sonably accurate, the future of American labor organizations 
depends upon the policies adhered to by management and upon 
the ability of old-line unionism to adjust itself to a situation in 
which many of the old causes of friction and of struggle in labor 
relations have disappeared. At any rate, it seems clear that 
unionism of the militant craft type, such as has been predom¬ 
inant in the American Federation, cannot hope to succeed in 
organizing workers in the great integrated and standardized 
industries which are typical of manufacture today. 

Questions 

1. Draw a contrast between the American Federation of Labor and the 

Industrial Workers of the World. 

2. What are the chief differences between unions and shop committees? 

3. Which do you favor? Why? 


290 


ECONOMICS 


References 

Carlton, F. T., Education and Industrial Evolution, 

- History and Problems of Organized Labor, 

- Organized Labor in American History. 

Gatlin, W. B., The Labor Problem. 

Commons, J. R., et al., History of Labor in the United States. 
Lauck, W. J., Political and Industrial Democracy. 
Patterson, S. H., Social Aspects of Industry, 




CHAPTER XXVIII 


LABOR MANAGEMENT 

Ignorance in Labor Management Costly. No competent 
engineer would build a bridge or design a locomotive without 
careful and painstaking consideration of stresses and strains, of 
the forces of gravitation, of adhesion and cohesion, of factors of 
safety, and of a multitude of other fundamental factors. To do 
otherwise would be to invite disaster. Likewise, if it runs counter 
to fundamental social forces, no plan for evolving a better so¬ 
cial and industrial edifice has a reasonable chance for success. 
Experiments in industrial management and personnel adminis¬ 
tration constitute investigations into the complexities and 
perplexities of social science or of human engineering. Obviously 
the determination of a rational labor policy involves the con¬ 
sideration of complicated and delicate forces. Nevertheless, 
nearly every person feels entirely competent to determine off¬ 
hand labor policies, political programs, and social platforms with 
only the aid of preconceived notions and inherited beliefs. Many 
are the blind attempts which are being made to solve industrial 
problems. In most cases the experiments remind one of the 
man ignorant of the automobile who tries to eliminate engine 
trouble by acting along the lines suggested by a series of hap¬ 
hazard guesses as to the difficulty; but ignorant social experi¬ 
mentation is often costly. As a rule, when attempts are made 
to analyze the fundamental causes of industrial strife, the 
assumption is made that the conflict is clearly one in which 
employers and investors are lined up in antagonism to the 
employees and wage receivers. The elements of friction are 
assumed, without further consideration, to be due primarily to 
differences in interests and points of view of employers and 
employees. The socialists and the conservatives have accepted 
these a priori premises. If this view be accurate, the solution 
evidently must be found in attempting to discover common 

291 


292 


ECONOMICS 


interests in industrial peace and in minimizing points of disagree¬ 
ment, but it may be necessary to delve more deeply into the 
intricacies of human psychology and of racial inheritance. 

The Field of Personnel Administration. The personnel or 
industrial relations department of a factory or a store deals 
primarily with human relations. It endeavors to reduce the 
friction and suspicion between management and men. It aims 
at increased productivity accompanied by improvement in the 
working conditions and in the well-being of the working force. 
A department dealing with personnel relations is of service if 
it aids in introducing scientific procedure into production 
methods, if it increases production, diminishes waste, and re¬ 
duces costs. Personnel work is advocated as a business proposi¬ 
tion; it is not a form of philanthropy or of altruism. Most 
emphatically the personnel department is not an instrument 
“to put something over”; its purpose is not that of keeping 
the workers quiet and fearful. A successful personnel depart¬ 
ment will work in the open. Personnel work is not welfare work 
installed in an attempt to soften the harshness of the competi¬ 
tive system. The science and art of personnel management 
with its application of scientific methods is needed in govern¬ 
mental service and in cooperative establishments as well as in 
industrial establishments of the typical kind. The greatest 
service of the personnel department consists in the promotion 
of goodwill between employers and employees—and goodwill 
is an intangible, but important, asset difficult of accurate 
measurement. A well-organized personnel department makes 
for improved human relations in industry, and improved human 
relations—teamwork—mean greater efficiency and larger out¬ 
put, or the department makes possible larger profits, higher 
wages, and lower costs and prices without sacrificing quality. 

In the last century the race in industry was usually won by 
the country and the firm which surpassed competitors in en¬ 
gineering technique. In the near future it may not unreasonably 
be expected that the race will be won by the nation and the 
industrial organizations which excel in human engineering, or 
in personnel administration in its broadest and best sense. 
Harmonious relations within a plant are more important than 


LABOR MANAGEMENT 


293 


excellent equipment, but, of course, the two should go hand in 
hand. The art of personnel administration rests on psychologi¬ 
cal and sociological science. In order to cure the ills of industry, 
the managers of business must have some insight into the 
psychological factors in human nature, must touch the hidden 
keys which aid in revealing the motives, purposes, and desires 
of men. EjSicient teamwork in industrial and educational 
affairs depends upon ability to disclose the ‘‘mainsprings of 
men.” The personnel department aims at the replacement of 
guesswork and traditional methods in the control and direction 
of a working force with scientific methods. It is a tool for the 
establishment and maintenance of industrial peace. 

Personnel work should be freed as far as possible from the 
emotional bias. Unfortunately emotional bias often creeps 
into relationships between human beings. Physical obstacles 
are dealt with calmly and scientifically, but human obstacles 
give rise to highly emotional states. Industrial peace and 
harmony are fundamentally matters of management—manage¬ 
ment which takes into account the impulses and incentives 
which control mankind. Only recently is it being comprehended 
that the main function of management is the development of 
teamwork among the various employees of the establishment. 
There is no panacea for industrial peace. If we are to take steps 
in that direction, the basic instincts and impulses of men and 
women must be carefully studied. To achieve progress toward 
industrial peace means that we must cease using all of our 
efforts in trying to adapt men to industry and begin attempt¬ 
ing to mold industry into greater harmony with human nature— 
a product of the ages-long experience of the human race. We 
have devoted too much attention to what it is considered 
human nature ought to be; more careful study and investigation 
of actual human nature is sorely needed. Why do men and 
women react as they do under the conditions now obtaining 
in industry? Under what conditions may these reactions be 
modified? 

The Road Leading toward Industrial Peace. Industrial 
peace—permanent, satisfactory peace with efficiency must 
come by the development of harmonious relations within the 


294 


ECONOMICS 


industrial group. It is a matter of teamwork, of joyous and will¬ 
ing cooperation. It is the outgrowth of man-to-man relation¬ 
ships. Peace gained at the expense of conflict and of court pro¬ 
cedure is not likely to be accompanied by such relationships 
within the industry and such interest in the outcome of the 
common enterprise as are conducive to teamwork, increased 
enterprise, and efficiency. The road leading toward industrial 
peace and progress is not that of conciliation, arbitration, or 
industrial courts, important and beneficial as these may be in 
certain cases. The road which ultimately must be traveled is 
that which leads toward mutual helpfulness and common inter¬ 
ests between management and men. 

The various lines of activity centered in a well-developed 
personnel department aid in pointing out the road over which 
we must travel in order to reach a state of industrial peace and 
of greater efficiency. The future of personnel work depends 
upon the existence and recognition of certain common interests 
between management and employees, upon the possibility of a 
certain amount of “integration” of interests. If there are no 
common interests between investors and workers, the personnel 
department has no function to perform. Let it be noted at the 
outset that many of the acute difficulties in industrial relations 
are not due to a feeling that the present order is hopelessly 
maladjusted. It may also be pointed out that the friction in 
industry has not grown entirely out of the situation developed 
by the rise of large-scale business, subdivision of labor, monot¬ 
ony, absentee ownership, and impersonal relations. Some of 
the worst cases of bad industrial relations may be found in the 
small shop—sweatshop—operated by the owner, and in which 
the use of machinery and subdivision of labor has not gone far. 

Ill will in industry causes incalculable business waste. It 
leads to increases in costs all along the line from the primary 
producer to the ultimate consumer. The most deplorable and 
costly labor troubles are not the spectacular ones which flare 
up in strikes and lockouts and which attract the attention of the 
newspapers and of the man in the street; they are the steady 
day-by-day disintegrating and retarding forces which are akin 
to friction in the bearings of a delicate machine—suspicion, ill 


LABOR MANAGEMENT 


295 


will, lack of interest in work, poor management, killing time, 
dilution of efficiency, sabotage. The items in factory manage¬ 
ment which are invisible to the casual visitor of a plant, which 
relate to the human side of industry, are those which count for 
much in the program for industrial peace. 

Much friction in industry is the result of ignorant, traditional, 
and unsympathetic treatment of the workers. Ill will and sus¬ 
picion are often due to harsh, unjust, and dictatorial treatment 
of workers by a foreman, to delays and confusion caused by bad 
management which reduce the wage received in the next pay 
envelop, to irregularity of work, to favoritism, to lack of con¬ 
sideration on the part of his superiors for the worker, to bad 
working conditions, to other irritating experiences incidental to 
the daily work of many industrial establishments. In short, 
much bad blood in industry is directly traceable to personnel 
relations. The factory worker whose feet get cold because he is 
obliged to stand on a concrete floor will ask himself: Why? He 
will brood over the matter and will become disgruntled with the 
management. A well-known business man interested in indus¬ 
trial relations tells about visiting a shop which was smoky and 
poorly ventilated. Some weeks before the men had asked in a 
formal manner for blowers and ventilation, but a long delay 
followed in getting the apparatus. At the time of the visit the 
apparatus had arrived but as yet no steps had been taken to 
install it. The management obviously was not interested in the 
welfare of its employees. Teamwork under such conditions was 
not to be anticipated. 

The little and often invisible difficulties are the ones which 
easily feed the flames of suspicion and hatred in industrial rela¬ 
tions in factories, stores, and mines. Little things make easy the 
work of the agitator. Discontented radicals are developed as the 
result of a cumulation of disagreeable episodes. The history of 
many labor difficulties has been compared to a snowball rolling 
down the mountain side. It starts from small beginnings but 
finally it becomes a large sphere of difficulty. On the other 
hand, kindliness, sympathy, thoughtfulness, and consideration, 
accompanied by square dealing and firmness, will go far toward 
developing good industrial relations in a plant. The teacher 


296 


ECONOMICS 


who treats his students with courtesy and fairness has very little 
difficulty. Students and workmen react much alike; human 
nature is essentially the same in all walks of life. The personnel 
department should, of course, emphasize the fundamental im¬ 
portance of square dealing, but it should also attempt to utilize 
such knowledge as we have of the science of human behavior. 
Industrial peace is fundamentally a problem of intelhgent 
management and of industrial control; it is not primarily one 
of outside-the-industry adjudication. 

Common Interests. Extremists, on the one hand, have as¬ 
serted that labor and capital ‘ffiave nothing in common.’^ On the 
other hand, certain blind optimists have insisted that labor and 
capital have only common interests. Clearly the truth hes some¬ 
where between these two points of view. Wage rates have been 
a fertile cause of industrial conflicts. Nevertheless, even at this 
point, there are certain common interests. Employees do not 
wish to insist upon such high wage rates as would force the 
industry to close down by making it permanently unprofitable. 
Employers are interested in pa 3 dng wages above that minimum 
which would force a reduction of the productivity and impair 
the stamina of the workers. There are common interests in the 
expansion within reasonable limits of the business, and in pre¬ 
venting its injury or destruction by adverse legislation. Labor 
and management may also find common interests in opposing 
special privilege which holds out of use land, natural resources, 
and patents. There is very little conflict between workers and 
employers who accept the advice of their personnel managers 
in regard to matters relating to health of workers, hours of 
labor, hours of recreation, and fatigue investigations. Certainly 
well-trained and efficient workers are of equal or of greater 
importance to the employer than up-to-date and properly con¬ 
structed and operated machinery. The industrial psychologist 
is ready to affirm that ‘‘every advance in knowledge, every 
improvement in scientific technique which makes the lot of the 
worker easier or affords him a better return for his labor, at once 
puts money into the pockets of the master.” ^ The task before 
the personnel manager is that of convincing the hard-headed 

1 See Harrison, H. D., Industrial Psychology, p. 167. 


LABOR MANAGEMENT 


297 


business man that there is a possibility of gaining the goodwill 
of his workers without sacrificing profits or business success. 
Indeed, the only healthy hope of business success in the face of 
stem competition may be bound up in human engineering. 
Doubtless the ease or the difficulty of educating the business 
man so that he may see the advantage of cultivating a new sort 
of industrial relations will depend upon the type of business and 
the training and experience of the executives. 

The Functions of the Personnel Department. The job of the 
personnel director in any industrial establishment is to study 
the problems of human behavior and to endeavor to apply the 
results of study and investigation in such a manner as to improve 
industrial relations and develop teamwork between management 
and the rank and file of workers in the plant. His work involves 
(1) a study of the psychology, incentives, and traditions of the 
workers and of the executives as well, and (2) a consideration 
of the technical methods of the plant in so far as these affect 
the interests, instincts, and traditions of the rank and file. 
The personnel department is not one that can be segregated 
from other departments. Its program cannot be carried out 
independently. The success of the personnel department de¬ 
pends in no small measure upon the ability to get cooperation 
and sympathetic consideration from the foremen, heads of 
departments, and the general manager. The functions of the 
personnel department are primarily advisory and educational. 
Teamwork is the keynote of personnel administration. If the 
executives of the company are not favorable to personnel man¬ 
agement, if they are introducing it as a newfangled remedy for 
a bad situation, the main job of the personnel manager will be 
to convince the management that personnel work is essential 
to future progress. 

The successful personnel manager will be able to exercise an 
educational influence upon other departments. For example, 
a personnel manager cannot greatly reduce labor turnover in a 
seasonal business unless he can educate the leaders in the sales 
department so that they will adopt methods which will aid in 
regularization. In other cases, it may be necessary to enlist the 
cooperation of the production manager. While much stress is 


298 


ECONOMICS 


laid in this chapter upon the application of scientific methods in 
business procedure, let it not be forgotten that the old funda¬ 
mentals of square dealing and of consideration for the other 
fellow are essential in the development and maintenance of ami¬ 
cable relations in industry. 

Emphasis has been laid upon the desirability of cooperation 
between management and men, but too often management has 
expected the employees to do all of the cooperating. Too fre¬ 
quently the management of an industrial plant has waited until 
trouble was brewing before it began to consider cooperating 
with the working force. Then the management hastily turned to 
conciliation, arbitration, impartial chairmen, shop committees, 
or personnel departments. A frantic attempt is crudely made 
to repair a poorly functioning business machine. A personnel 
department introduced as a last resort will function under great 
difficulties. The best time to introduce personnel work into a 
plant is when there are no symptoms of acute distress. Too many 
executives devote an unnecessarily large portion of their time, 
energy, and ingenuity in wage bargaining and in conflicts over 
wages, hours, and shop conditions. A personnel department 
should relieve the executive of such burdens. After all, is not 
wage bargaining a minor matter in management and in profit 
making? This seems to have been the attitude taken nearly a 
generation ago by the managers of the Filene store in Boston. 
Low wages may mean easy and immediate profits, but at the 
expense of later profits and efficiency. A personnel manager 
will stress the importance of conferences, publicity, and work¬ 
ers' participation in control. 

The study of a textbook on personnel administration or the 
listening to lectures by experts upon the subject will not pro¬ 
duce trained personnel managers. A systematic course of study 
in personnel administration is not a substitute for actual con¬ 
tacts in the industrial world. It should, however, shorten the 
time required to get the necessary experience and will enable 
one to make good use of his experience. No one should under¬ 
take personnel work until after he has lived for a time the actual 
life of a worker in factory, mine, or store, and knows what is 
‘^on the worker's mind." The personnel manager needs a sym- 


LABOR MANAGEMENT 


299 


pathetic understanding of workers, their problems, and urges; 
but more is required. The systematic study of personnel ad¬ 
ministration should direct the student toward a consideration 
of the principles underlying industrial psychology. Men and 
women are called for in this phase of industrial management 
who are interested in social engineering and who have absorbed 
some of the basic principles involved in establishing peaceful 
industrial relationships. In reading and study the student will 
gain more by getting an understanding of the fundamentals of 
industrial psychology than by the consideration of detailed 
plans and programs which have been proposed or utilized. 

Upon the factory of today are focused many sciences and arts. 
In the up-to-date industrial plant are found an intricate organ¬ 
ization of machinery, the utilization of natural resources and 
power, and the application of human resources and powers. For 
effectiveness it is at least as important that there be an elaborate 
and scientific organization for the utilization of man-power as 
that good technical methods be employed in the utilization of 
power and machinery. The “accumulated wisdom of civiliza¬ 
tion” may well be applied to the care and direction of man-power. 
Consequently the functions of a personnel department are many. 
The chief functions may be enumerated as follows: 

1. Employment—interviewing and selecting employees, in¬ 
troducing them to their work, transfer, promotion, discharge, 
regularization of work. 

2. Industrial Relations—the adjustment of grievances, or¬ 
ganization of shop committees, adoption of shop rules and of 
production standards, consideration of wages, hours, and other 
working conditions. 

3. Education—training courses for executives, foremen, and 
workers, apprenticeship, suggestion systems, plant paper, li¬ 
brary, etc. 

4. Health and Safety—physical examinations, first aid, hos¬ 
pital, reduction of accidents, sanitation, lighting, etc. 

5. Recreation—athletics, dramatics, vacations, outings, rest 
rooms, etc. 

6. Welfare—housing, thrift, cooperative purchases^ lunch 
rooms, etc. 


300 


ECONOMICS 


7. Research—job analysis, motion study, methods of wage 
payment, cost of living, incentives, fatigue, labor turnover. 

In many plants where some of the normal functions of a weU- 
organized personnel department are being adequately cared 
for by other departments it may be well not to force a transfer 
to the personnel department. 

Treatment of Workers. In any plant in which industrial 
peace is to obtain, the workers must be treated as men and not 
as machines or as menials. Wage workers are actuated by the 
same motives and instinctive reactions as are other human 
beings. Each man and each woman aspires to be a “real” 
person. To treat an employee contemptuously or to recognize 
him only by an impersonal number stings the normal man like 
salt rubbed in an open sore. Such treatment prepares the soil 
for a crop of unrest and inefficiency. Teamwork wins in the 
business world as well as elsewhere. 

The real industrial statesman is a leader of his employees. If he 
is not, someone else will be. The main task of management is 
with labor—to secure and retain its good will and cooperation. 
Men like to work with others, but not under them. Workers 
are demanding agreeable management. Instead of considering 
that men work for an employer, the concept ought in good faith 
to be pushed into the foreground that employees work with em¬ 
ployers for mutual benefit. Cooperation, not competition, in 
the labor-capital relationship is the aim. When this aim is 
partially achieved, close supervision will become unnecessary. 
All connected with the industry will be interested in getting 
results. Each worker will try to become an industrial advisor 
for the improvement of methods and the increase of output. 
“Mitten management” of the traction system of Philadelphia 
is one of the notable examples of what the square deal and open 
diplomacy will accomplish in the world of industry. 

The world is ruled by feelings rather than by figures. Men 
are controlled by suggestion to a much larger degree than by 
reason. The power of suggestion, however, depends very largely 
upon the prestige of the person making the suggestion. The 
leader among men can easily suggest and have his suggestions 
followed. This is an important, but often overlooked, considera- 


LABOR MANAGEMENT 


301 


tion in industrial relationships. All groups possess leaders; 
workers in factories and elsewhere will be guided by leaders. 
Ji the management does not lead, some other person will—a 
worker, a union official, an agitator, a local politician. The em¬ 
ployer should be a leader. Efficient industrial management 
means leadership. A successful employer of the new type will 
‘^sell himself to his employees as well as to the purchasers of his 
products.” The goodwill of workers as well as of consumers will 
be obtained by efficient industrial managers. 

A growing sense of the worth and dignity of man is essential 
to industrial peace. Belittle the worker, ignore him, deprive 
him of the sense of worthwhileness, and you drive him into a 
state of apathy or of bitter hostility. Loyalty, love of workman¬ 
ship, and interest in the job are destroyed by such treatment. 
The old “drive” methods of management and of foremanship 
ignored the fundamentals of human nature. Such methods are 
inefficient and out of date. The old business point of view has 
led to the operation of our great industrial machine at about 
50 per cent efficiency. 


Questions 

1. Are there any common interests between investors and wage workers 
in an industry? 

2. Between the active management and the workers? 

3. Give examples of friction in industrial relations. 

4. Have you come in touch with a “grouchy” foreman or boss? 

References 

Burtt, H. E., Psychology and Industrial Efficiency. 

Commons, J. R., Industrial Goodwill. 

Laird, D. A., Psychology and Profits. 

Overstreet, H. A., Infiuencing Human Behavior. 

Tead, 0., Human Nature and Management. 

Tead, 0., and Metcalf, H. C., Personnel Administration. 

Watkins, G. S., Labor Management. 

Williams, W., The Mainsyrings of Men. 


CHAPTER XXIX 


STEADY EMPLOYMENT 

Unemplo3nnent Is a Community Problem. Wages in the 
United States may be higher than in other countries, but ir¬ 
regularity of work is a great menace to the American wage 
earner. The job now constitutes the only significant source of 
income for a major fraction of our wage workers; it is the source 
of bread and butter. The typical wage-working family lives in 
a city or industrial town. When the breadwinner of the family is 
laid off, income stops, but living expenses continue. Wage 
workers of a generation or more ago lived upon a small farm or 
had a garden spot, a cow, and a few fowls to help provide food 
for the family. Today such aids are rare. Income is now re¬ 
ceived almost wholly in money. A worker’s scheme of life is 
overturned when he loses his job. Wages “represent homes and 
families and domestic relations.” Permanency of a job and 
regularity of work are prime essentials for the welfare of the 
wage worker and his family. The problem of reducing unemploy¬ 
ment and irregularity of employment is a community and an 
industrial affair. Intelligently directed effort is necessary for the 
development of plans for the stabilization of industry. Irregu¬ 
larity in plant operation and of employment is very largely the 
result of bad, shortsighted, or indifferent management, of the 
lack of business ability, of the absence of consideration for 
workers, and of the failure to achieve industrial coordination. 
Unemployment and irregularity of employment can no longer 
be looked upon as decrees of fate. These evils are the result of 
human blunders and indifference. No considerable fraction of 
the blame can be laid to the wage workers. Surely if we expect 
men to work steadily on the job, management must be prepared 
to furnish steady jobs. The obligation of regularity is mutual. 

Irregularity of employment should be attacked simultane¬ 
ously on two fronts: (1) Each business unit may study the 

302 


STEADY EMPLOYMENT 


303 


situation with a view to increasing its regularity of operation. 
(2) Governmental action may help control the credit situation, 
develop a public works’ program, furnish statistical informa¬ 
tion, develop a nation-wide system of employment agencies, and 
aid in furnishing incentives to management in the endeavor to 
stabilize employment. Unemployment is a significant challenge 
to business and to government. To keep industry going at a 
high pitch is a fundamental social, economic, and engineering 
problem. While there are many significant isolated cases of 
successful regularization of industry, the American people and 
American employers have never faced irregular employment and 
unemployment as an engineering problem to be studied scien¬ 
tifically and solved. Little interest has been manifested in the 
jobless. Much less attention has been given to reducing the 
waste of man-power than to the elimination of waste of materials 
and to inefficient industrial methods. There is urgent need for 
directing the brain power of the nation, our ingenuity, and our 
inventive ability toward the reduction of unemployment and of 
industrial irregularities. 

The business man of today thinks much about profits and 
competition, about high-pressure salesmanship, and invest¬ 
ments, but he is giving too little thought to the rank and file 
of workers upon whose prosperity and welfare depend in no 
small measure community prosperity and well-being. High- 
pressure salesmanship is itself an indication of a lack of resource¬ 
fulness. Lower prices and greater efficiency, together with plans 
for placing greater purchasing power in the hands of the rank 
and file, would accomplish more for industry and for markets 
than the crude direct attacks of high-pressure salesmen. The 
business man and the investor are demanding a steady income 
and a sure return for their business skill and their investments. 
Labor is likewise interested in steady and certain employment 
at reasonable wages. The investor has been given a considerable 
degree of security, but the wage worker is perforce a speculator. 
The probability of steady employment and of the continuity of 
wage payments is far less than the probability of the regular 
receipt of income by bondholders or by owners of mortgages. 
If absentee investors are made reasonably secure as to their 


304 


ECONOMICS 


property and income, is it unreasonable for resident workers 
who are actively engaged in the industry to ask for the protec¬ 
tion afforded by job security? If business and government wish 
to reduce unrest and radicalism, efforts should be directed 
toward giving the workers the same security that investors 
crave. Why should the unemployed or the irregularly employed 
look upon stability of government or security of property 
rights as anything of great import? 

Business men are able to see and to understand wastes in 
production in connection with materials and machines. It is 
more difficult for them to visualize the distressing and costly 
human wastes due to unemployment—lost labor power, dis¬ 
jointed households, the emasculation or cancellation of thrift, 
the loss of stamina, and the degeneracy of the out-of-work. If 
the income of the worker can be stabilized, a long step may be 
taken toward stabilizing purchasing power and toward regular¬ 
ization of industry. It will give business buyers. To give em¬ 
ployment to the unemployed would be to develop an enormous 
home market. To put an army of a million unemployed at work 
even at the extremely low wage of $1,500 per year would mean 
a billion-and-a-half dollar market. Of course this demand would 
not be all additional, as the unemployed and their families exist 
on past savings, charity, etc. The problem is fundamentally 
that of creating a sufficiently effective demand to furnish 
emplo 3 mient for workers who have been displaced by machinery 
or laid off because of the slowing down of demand. Our total 
wants are not satiated, but the community at times is not able 
to buy what it is prepared to produce or has actually produced. 
There is always work that should be done, but there are not 
always jobs. 

Statistics of Employment. No accurate statistics of the 
amount of unemplo 3 nnent in the United States are as yet avail¬ 
able. The census of 1930 undertook a nation-wide survey of the 
situation. The Labor Bureau, Inc., estimated that in 1927 the 
“net unemployment” was 4,000,000. Even in the best of years 
there are probably 750,000 to 1,000,000 unemployed. Between 
a good and a bad year the number of employed may fluctuate by 
a total of two, three, or even more millions. This type of fluctua- 


STEADY EMPLOYMENT 


305 


tion in employed is called cyclical. There is also much seasonal 
fluctuation in employment. The famous Report on Waste in 
Industry by the Federated American Engineering Societies 
estimated that clothing workers were idle about 31 per cent of 
the annual working time; shoeworkers, 25 per cent; and building 
trades workers, 37 per cent. The bituminous coal industry is 
one in which miners are idle on the average about 93 days each 
year. In 1925 it was estimated that the typical American wage 
worker lost 60 days because of unemployment each year—30 
days because of no work and 30 days because of part-time 
work.^ 

The Effect of Unemplo3nnent upon the Worker and His 
Family. Unemployment and irregularity of employment are 
serious industrial ills or diseases. Unemployment is the master 
test of defectiveness in our industrial order as it exists today. 
It is a sure indicator of important social and industrial malad¬ 
justments. As has been suggested, insecurity of income and of 
the job is the most tantalizing and distressing fear which haunts 
the worker in this age of the machine. A job is the source of 
food, clothing, and shelter. The fear of losing one’s job is com¬ 
parable to the fear of famine which so frequently and so omi¬ 
nously confronted our ancestors of the ages long past. This 
nightmare of insecurity has direct and far-reaching effects in 
industrial affairs. Irregularity of work, whether due to seasonal 
changes, to cyclical modifications in the business and financial 
world, to arbitrary discharge, or to some other influence beyond 
the direct control of the worker, has induced employees to 
piece out the job and to join militant organizations featuring 
restrictive rules and regulations in regard to working policies. 
Irregular work and fluctuating income are prolific sources of 
discontent, ill will, and destructive radicalism. 

Unemployment is desolating and devastating, corroding and 
corrupting, in its influence upon workers and their families. The 
jerky method of doing business leads inevitably to alternate 
periods of taking on and of laying off workers. Job-hunting, 
scarcity, want, wage-earning instead of schooflng for the chil¬ 
dren, taking boarders, charity, or perhaps the necessity of re- 

1 Forsberg, A. B., The Master Builder, July, 1925. 


306 


ECONOMICS 


moval to another locality, face the man who is unceremoniously 
laid off and his family. The man out of a job who goes from 
plant to plant, seeking pack-pedlar-hke to sell his labor power, 
gets more and more despondent and disreputable-looking as the 
days drearily pass. Affairs at home grow worse and worse as 
economy after economy is practiced. Many a man laid off has 
started out bravely and hopefully in search of a new job, only to 
be transformed after many disheartening experiences in work¬ 
places where no help is wanted, and after working at many odd 
jobs, into a vagrant and an unemployable, or into a criminal. 
This is the tragedy of unemployment. The let-out and the 
industrially discarded are face to face with grim want in the 
midst of smiling plenty. They are failures and down-and-outers 
in a land of prosperity and of industrial activity. In the words 
of Whiting Williams, ‘‘nothing but experience can demonstrate 
how thoroughly the man who has no job, and knows not where 
to find one, feels himself today the absolute zero of personal 
worthlessness and insignificance.’’ The industrial world is also 
confronted by a large, floating, poorly educated, improperly 
trained, and undisciplined horde of wage earners. Young boys 
and girls leaving school early in life and drifting from one blind- 
alley job to another are constantly recruiting the ranks of the 
irregularly employed. And, at the other end of this great drab 
line, older workers are entering the repulsive ranks of the un¬ 
employable, the pauper, and the criminal. Here we touch one 
of the sorest spots in our industrial life. The magnitude of the 
waste of man-power involved is appalling, and the community 
problems connected with charity and crime which grow out of 
irregularity of employment are alarming. 

Effects of Unemplo 3 rment upon Purchasing Power. The idle 
worker no longer receives wages. His purchasing power is re¬ 
duced and his effective demand for the products of other indus¬ 
tries is curtailed. This in turn leads to more unemployment. A 
vicious circle is followed—unemployment, less purchasing power, 
less demand for products, more unemployment. In 1921 the 
editor of Industrial Management declared that “unemploy¬ 
ment is a cause, not an effect, of industrial depression.” From 
the point of view of building up markets for the output of large- 


STEADY EMPLOYMENT 


307 


scale business, the economic importance of regularizing indus¬ 
try is clear; it would lead to business with buyers. 

In earlier centuries scarcity—famine—was the great menace 
to the rank and file of the population. Today, in this new era 
of science, the machine, and power, over-production seems to 
be the great danger. Over-production in this sense means pro¬ 
ducing more than the community, for some reason, is able to 
purchase. “Purchasing power,” writes Stuart Chase, “is the 
final arbiter of all jobs under the prevailing financial system.” 
In a time of depression and of unemployment industry has the 
men, machines, materials, and money (credit) for active en¬ 
deavor, but a fifth “M”—market—is lacking. Men who want 
food, clothing, shelter, comforts, and luxuries are anxious to 
work so that they may obtain adequate purchasing power which 
they lack. As consumers, the members of the community are 
unable to purchase what they, as producers, are prepared to 
furnish. In the picturesque language of another, “while these 
men beat the streets hunting for jobs, machines they might 
have operated stood idle. Materials, which might have been 
utilized by the machines, piled up on farms and rotted. Farmers 
in the Middle West burned corn for fuel because it was not worth 
hauling to town, while people in the cities felt the bitter gnaws 
of hunger. People were going about ragged while farmers de¬ 
spaired because they could not sell their wool, and clothing man¬ 
ufacturers deplored the idleness of their machines.” Briefly 
stated, the big problem is: In a time of depression, how can 
purchasing power be placed in the hands of the wage workers? ^ 
Technological Unemplo 3 ment. The temporary displacement 
of men by machines is not new. It is as old as the Industrial Rev¬ 
olution. Generations of workers have feared and opposed the 
introduction of new types of machines. It has often been assumed 
that machines have helped to increase output without reducing 
the demand for workers. Decade after decade factories and 
machines multiplied and also the number of workers employed 
in factories increased. A machine might temporarily throw a 
worker out of a job, but ere long it was optimistically declared 
he would find a good job. The worker, however, is primarily 
’•See Chapter on Business Cycles. 


308 


ECONOMICS 


interested in the short run, in jobs and wages today and to¬ 
morrow. It is cold comfort for the displaced man to learn that 
next year matters will, be readjusted and another job found. 

Since the War, however, a new situation has arisen. “Some¬ 
thing cardinal has happened; some mighty corner has been 
rounded.^^ The introduction of machinery, power, and improved 
management methods has led to an extraordinary increase in 
production, while the number of wage earners in agriculture, 
manufacturing, mining, and railroad transportation has actually 
declined. Changes, displacements, and readjustments are taking 
place with an unprecedented rapidity. The firing rate in our 
major occupations is more rapid that the hiring rate. In other 
fields displacement is also going on at an extraordinary pace. 
The automatic telephone is eliminating the “phone girl,'’ the 
machine man is throwing switches in power houses, “canned 
music” is putting the professional musician on the streets. In 
recent years mergers of corporations have displaced a consider¬ 
able number of salaried men who felt that their positions were 
secure. New jobs are appearing to take up the slack due to 
displacement and population growth. Garages, service stations, 
beauty parlors, taxicabs, insurance and bond selling, and other 
forms of personal service require the services of many work¬ 
ers. Does the displaced man get a new job? If so, is it the same 
or a different type of job? How long must he wait before obtain¬ 
ing a new job? What is known about the fate of the workers 
displaced in the major industries of the nation? 

Two studies of the fate of men discharged because of lack of 
work give some indication of the “labor absorbing power of 
American industry.” In the summer of 1928 an investigation 
was made of 370 clothing cutters in Chicago who were thrown 
out of work in the period from 1920 to 1926 because of technical 
changes in the industry. Only 69 out of the total found other 
work immediately. One-third of the number lost six months 
or more before new jobs were located. About one-fifth found 
jobs in the clothing industry. Of the remainder, 236 were work¬ 
ing in occupations not similar to their former work. Another 
investigation traced the experiences of 754 workers in four in¬ 
dustrial centers. These workers had been discharged in the 


STEADY EMPLOYMENT 


309 


twelve months preceding September, 1928, because their serv¬ 
ices were no longer needed. It was ascertained that 45.5 per 
cent of those investigated were still unemployed when inter¬ 
viewed. Only 202 out of the 754 had been idle for less than 
six months after losing their jobs. These two investigations 
point unmistakably to the conclusion that displacement is a 
serious contingency to the average worker.^ 

Certain employing concerns have attempted to help bear the 
burdens of adjustment to new methods. A dismissal wage may 
be paid. The employment department may strive to place the 
workers who are soon to be let out in other positions with the 
company or attempt to place them elsewhere. In 1926 Hart, 
Schaffner, and Marx, under an agreement with the Amalgamated 
Clothing Workers, discharged 150 cutters because of changed 
methods, but each man discharged received $500 paid from a 
fund to which the Company contributed $50,000 and the Union 
$25,000. In the interests of efficiency and industrial good will, 
the exercise of the power to hire and fire indiscriminately, or to 
increase and decrease the working force of an establishment in 
an arbitrary fashion, should be curtailed. According to newer 
standards of social ethics, the cost of readjustment caused by 
introduction of new machines and new processes should not 
rest solely upon the shoulders of the displaced workers and 
their families. If the man who is displaced by a machine be¬ 
comes waste, industry and society, as well as the man, are ad¬ 
versely affected. Under a rational ordering of industry the 
machine would release workers for other kinds of work. Brain 
power applied to the problem will reduce the ^^growing pains’’ of 
a rapidly expanding industrial civilization. Prosperity may be 
planned. 

Plans for Stabilizing Employment. There is no panacea for 
regularizing industry and eliminating unemplo 3 mient. The 
problem is complex. The causes of unemployment and of ir¬ 
regularity of emplo 3 mient are a multitude. Consequently, it 

^ Myers, R. J., Journal of Political Economy, August, 1929; Lubin, I., Pro¬ 
ceedings of the American Statistical Association, March, 1929; see also, 
Clague, E., and Couper, W. J., Quarterly Journal of Economics, February, 
1931. 


310 


ECONOMICS 


should be attacked on several fronts at the same time. Briefly 
stated, attempts to find a solution require action on the part of 
employers, of society, and of both cooperating together. 

1. Of first importance is the carrying on of regularization 
projects for individual plants. This involves the development of 
improved managerial technique and the elimination of man¬ 
agerial indifference. The responsibility of employing concerns 
for the evils of irregularity should be emphasized. It has been 
pointed out that, in general health campaigns, little can be 
accomplished so long as certain centers of infection remain. 
Society or government is seriously handicapped in striving for 
the elimination of involuntary unemployment so long as em¬ 
ployers do not use engineering methods in an attempt to regular¬ 
ize the operation of the plants under their control. 

Many successful attempts to regularize plant operation have 
been made. Notable examples are found in the case of The 
Dennison Company, the clothing industry. Hills Brothers, The 
Sherwin-Williams Paint Company, The Procter and Gamble 
Company, and The Western Electric Company. These cor¬ 
porations have in a large measure eliminated the jerky method 
of operation, and an ounce of successful practice is worth much 
theorizing about stabilization. A management following tradi¬ 
tional methods is likely to assert confidently that its particular 
business is different from any other and that it cannot be 
regularized. The firms mentioned above, however, represent 
very different types of industry and have resorted to different 
methods in regularization. The engineer W. R. Bassett writes: 
“I have yet to see the business which cannot either be continued 
through the whole year or be organized to take on another 
seasonal product, so that the full force can be used through the 
whole year.” 

Among the schemes which forward-looking and alert man¬ 
agers adopt for stabilizing their businesses are the following: 
lengthen the buying season by stimulating off-season demand; 
remove obstacles to off-season buying—for example, pack food 
products properly so as to reduce spoilage; develop new uses for 
products; search out new markets which have their peaks of 
demand at different seasons from the older markets; add side 


STEADY EMPLOYMENT 


311 


lines which may be dovetailed with the main output of the 
plant; simplify the regular lines by the elimination of unneces¬ 
sary styles and sizes; manufacture staple articles for stock in the 
off-season; develop a definite sales and production program; 
reduce prices at strategic times in order to keep demand stead¬ 
ier. No two concerns have exactly the same obstacles to contend 
with, but to assert that regularization cannot be accomplished 
within reasonable limits is the answer of the lazy or ignorant 
manager. 

A firm that has heavy overhead expenses and that has in¬ 
stalled a good cost-accounting system disclosing clearly the 
presence of such overhead expenses has potent financial incen¬ 
tives for regularizing the pace of operation. In order to stimu¬ 
late the management of irregularly operated industries to adopt 
a program of regularization, the following suggestions may be 
offered. 

(а) Unemployment insurance of the type proposed in the 
State of Wisconsin would tend to stimulate projects for regular¬ 
ization. Under the Wisconsin plan for unemployment insurance 
it is proposed to put additional burdens upon plants that run 
irregularly. Unemployment insurance would also put some 
additional purchasing power in the hands of the unemployed 
and their families and help save them from pauperization. 

(б) It may be suggested that unions making trade agreements 
with employing corporations allow employers who regularize 
their work to pay somewhat lower day and piece wages than 
those who operate irregularly. 

(c) Some provision might be made for workers thrown out of 
work by new machines or methods, such as the payment of a 
dismissal wage or giving a bonus to those who voluntarily with¬ 
draw, as has been done in the clothing industry. 

2. The second type of remedial plan centers directly or in¬ 
directly around the regulation of credit. It should be recalled 
that the typical purchase of today is made by means of a credit 
dollar (bank check, bank note, or greenback) instead of with 
metallic money. According to proposals for credit regulation, 
in a time of optimism and prosperity credit facilities should be 
curtailed, but in a time of pessimism and of increasing unem- 


312 


ECONOMICS 


ployment, credit should be readily obtained for sound projects. 
An employment index might be used as a guide in determining 
when the brakes should be used and when released. To be 
effective, new credit dollars must be used for productive rather 
than for speculative purposes. Under this general heading three 
specific plans may be briefly considered. 

(а) A Planned Public Works Program. The federal, state, 
and local governmental units spend each year large sums of 
money in erecting public buildings, in constructing roads, in 
river and harbor improvements, and in a variety of other proj¬ 
ects. A definite plan covering a period of, say, ten years would 
enable a controlling commission to increase the amount of 
construction work in a period of slack work and correspondingly 
to decrease it in a period of prosperity. 

The expansion of a public works program will ordinarily 
require the increase of credit through bond issues or bank 
loans, and the use of such dollars in the construction of public 
works and buildings will primarily give employment to many 
in such construction work and in the production of materials. 
In an indirect fashion other industries will be stimulated be¬ 
cause the workers employed in those industries directly affected 
will become better customers of other businesses. The conse¬ 
quences of an expansion program are cumulative in effecting 
the reduction of unemployment, exactly as the shutting down 
of an establishment tends to be cumulative in its effect upon 
the sum total of employment. 

(б) Private corporations should also be encouraged to make 
necessary improvements and additions during a period of slack 
demand. The success of a planned program of public works 
and of private industry expansion will be in no small measure 
dependent upon the prevention of over-expansion of industries 
and of public works by shortsighted business men and politi¬ 
cians during a period of optimism and prosperity. It may be 
necessary for the banks, guided by the Federal Reserve Board, 
to take concerted action in regard to credit facilities. Indeed, 
a program of allocation of capital and of credit to different in¬ 
dustries in accord with some general plan may be suggested as 
desirable. The use of credit, if adequately regulated—expanded 


STEADY EMPLOYMENT 


313 


in a period of depression and contracted in a period of optimism 

may act as a flywheel to smooth out irregularities and ab¬ 
normalities in purchasing power and demand. 

(c) The family was once the productive or economic unit of so¬ 
ciety. It provided sustenance for its members. Business has 
displaced the family as the productive unit, but civilized nations 
in times of peace have not developed systematic plans for the 
sustenance of the people. In the words of Wesley C. Mitchell, 
“ they continue to rely on the badly coordinated efforts of private 
initiative.” A city often regulates the type of building or of 
business which may be built or established on a given street. 
We are very familiar with the manifold regulations and restric¬ 
tions which are thrown about a railway or a municipal utility. 
May we not likewise begin regulating, in the interest of workers 
and the public, the growth and expansion of certain key indus¬ 
tries? As has been suggested, the soft-coal industry is distinctly 
a sick industry. It is troubled with recurrent disagreements be¬ 
tween employers and workers. It is over-developed—too much 
capital is invested in the industry and too many workers are 
attached to it. Evidently the soft-coal industry is unable alone 
to solve its difficulties—strikes, under-employment, over-devel¬ 
opment, etc. A constructive national policy is needed; the diffi- 
culties are distinctly of national scope and import. Over-develop¬ 
ment is also found in many other industries—the shoe industry, 
iron and steel, lumbering, etc. In these industries are found 
irregularity of employment and unemployment of both labor 
and capital, and unemployment is a visible token of profound 
and disquieting economic and industrial maladjustments. 
Is it not pertinent to inquire as to the r61e the government 
may legitimately play in reducing these irregularities and 
maladj ustments? 

3. The stabilization of the value of the dollar will likewise 
aid in reducing irregularity in industrial activity. The “dance 
of the dollar” has been disastrous in our monetary history.^ 

4. As unemployment grows, the concerted lowering of prices 
toward the minimum of variable costs, without cutting wages, 
would tend to increase the effective demand for goods. This 

1 See Chapter on Money and Credit. 


314 


ECONOMICS 


policy would make possible greater pTirchases and would aid 
in keeping workers employed and, therefore, in possession of 
their customary number of dollars for purchasing. Industries 
having high overhead expenses would not find this policy 
difficult as compared with one of partial or complete shut¬ 
down. Mr. E. A. Filene asserts that if the prices of necessities 
and much-desired luxuries were cut 50 per cent, it would be 
difficult to produce all that would be demanded (purchased). 

5. A well-organized system of public emplo 3 unent agencies 
would be of great assistance in bringing the “jobless man and 
the manless job’^ together. Employment agencies obviously 
cannot make jobs, but such institutions are able to act as clear¬ 
ing houses for labor power, and to gather and utilize informa¬ 
tion as to the labor market. The government—federal, state, 
and local—should be called upon to give greater assistance in 
vocational training. In an epoch of great industrial flux, the 
well-trained, adaptable man confronts fewer serious employ¬ 
ment problems than others. A considerable amount of irregu¬ 
larity of employment is due to sickness. Education in regard 
to personal hygiene and diet, greater care in safeguarding the 
water and milk supply, the reduction of smoke and dust in 
our city atmosphere, the yearly physical examination of individ¬ 
uals by qualified physicians, and other health measures will 
raise the level of health and of efficiency. 

Labor Maintenance. A fairly stable labor force is desirable in 
almost any industry. A large labor turnover, a procession of 
workers into and out of an establishment, is expensive and 
conducive to inefficiency. The costs of labor turnover may be 
classified as follows: 

Hiring Reduced productivity 

Instruction Spoiled work 

Wear and tear 

The process of selecting men, introducing them to their new 
job, and instructing or training them in their new work is ob¬ 
viously a charge upon the industry. New workers, unfamiliar 
with the machinery and the surroundings, cause greater wear and 
tear upon machinery—for a short period at least. Their pro- 


STEADY EMPLOYMENT 


315 


ductivity will not be up to standard, there will be more spoiled 
work and more danger of accidents than in the case of seasoned 
employees of similar skill and dependability. A cost of $30 to 
$150, or more, has been estimated as the financial burden of the 
termination of service and replacement by another worker. 

A high labor maintenance or “holdover”—the stabihty or 
permanence of a labor force—is desirable. It is one of the tests 
of managerial efficiency. “As a man is known by the company 
he keeps, so shall a company be known by the men it keeps.” 
Among the important factors making for labor holdover are: 

Attractive wages Agreeable work 

Steady work Short working day 

These are fundamental in attracting and keeping a high-grade 
labor force. A good employment department, which makes 
careful selection of workers with a view to fitting the worker to 
the job, will be of great assistance in reducing labor turnover. 
The greatest amount of turnover usually occurs in the first year 
or half-year of employment, before the worker feels at home in 
his new workplace. An example of low labor holdover is fur¬ 
nished by a firm manufacturing rugs and carpets in an Eastern 
city. Roughly speaking, three out of every four employees had 
been hired within the preceding twelve months. On the other 
hand, a large corporation producing electrical appliances was 
proud of the fact that at least 50 per cent of its employees 
were five-year (or over) men. 

However, it should be remembered that labor turnover is a 
product of liberty. There was a minimum of labor turnover 
under slavery and feudalism. It is desirable from the standpoint 
of progress occasionally to bring new blood into an organization. 
Old or inefficient employees must from time to time be retired or 
removed. The worker who has been employed in several plants 
possesses a diversified, and often desirable, experience. He has 
a feeling of independence, and wage rates may be somewhat 
higher because of labor mobility. It has been pointed out that 
other labor losses are as important as those connected with 
labor turnover. Irregular attendance and lack of punctuality 
will reduce the efficiency of a labor force. Failure to keep the 


316 


ECONOMICS 


force up to a high standard of efficiency because of excessive 
fatigue, low morale, lack of interest, and other personnel matters 
will also be expensive and demoraUzing. 

Questions 

1. Why is unemployment more serious for the workers of today than 
for those of earlier generations? 

2. What is technological unemployment? Give examples. 

3. A factory has a high labor turnover. Make suggestions for investi¬ 
gation and remedy. 

4. Do you favor an unemployment insurance law in your state? Why? 
6. Give an example of plant regularization. 

References 

Carlton, F. T., History and Problems of Organized Labor j Ch. 17. 
Chase, S., Prosperity: Fact or Myth. 

Feldman, H., Regularization of Employment. 

Hoopingarner, D. L., Labor Relations in Industry, Chs. 15, 16, 26. 
Lewisohn, S. a., and others. Can Business Prevent Unemployment? 
Lynd, R. S., Middletown. 

Patterson, S. H., Social Aspects of Industry, Ch. 11. 

The Graphic Survey, April 1, 1929. 

WissLER, W., Labor Management. 

WoLMAN, L., in Recent Economic Changes, Vol. II, Ch. 6. 


CHAPTER XXX 


THE LAW IN INDUSTRIAL RELATIONS 

The Function of Government in Industry. The proper rela¬ 
tion between government and business has for generations been 
debated. One view which was prevalent during the last of the 
eighteenth century and the early part of the nineteenth holds 
that government should do little except protect property rights, 
enforce the fulfillment of valid contracts, and guard against 
invasion by foreign foes and against uprisings at home. This is 
the laissez faire or non-interference program. At the other 
extreme stand the socialists and communists who would place 
practically all business activity in the hands of governmental 
authorities. In the United States we actually follow a middle-of- 
the-road policy. The government carries on certain businesses 
and regulates others with more or less rigidity. 

Legal Complications. In the United States legislation in 
regard to industrial relations is subject to two controlling cir¬ 
cumstances. In the first place, a measure for which there is a 
popular demand may be placed upon the statute books of a 
state or of the nation, and the state or federal officials provided 
to enforce the law. Presently the statute may be violated and 
the violator brought into court for punishment. His lawyers 
may assert that the law which he is accused of violating is un¬ 
constitutional, conflicts with either the state or the federal con¬ 
stitution. The courts may agree with this plea and declare the 
law null and void. The highest legal authority in regard to a 
conflict between a law and the provisions of the state constitu¬ 
tions is the state supreme court; in regard to the Federal Con¬ 
stitution it is the United States Supreme Court. Secondly, we 
five in the United States under a dual form of government- 
federal and state. To the federal government are delegated 
certain powers and functions; all others are left to the states or 
to the people. The federal government may regulate interstate 

317 


318 


ECONOMICS 


and foreign commerce, but the regulation of hours of labor and 
of matters relating to safety and sanitation in factories rests with 
the various states. Such regulations, therefore, may vary with 
each of the forty-eight states. 

Our constitution and laws provide for freedom of contract; 
that is, individuals have a right to bargain in regard to the buy¬ 
ing and selling of labor and commodities without interference, 
unless a particular contract is held to be contrary to public 
policy. The elastic element in our intricate constitutional system 
is found in the concept ^‘contrary to public policy.” As our in¬ 
dustrial and social life has become more intricate and interde¬ 
pendent, the legal interpretation of this phrase has changed. 
Laws regulating factory conditions which fifty years ago would 
unquestionably have been declared unconstitutional are now 
held by our courts to pass the test of constitutionality. For 
example, if a state passes a law limiting the hours of labor in 
coal mines to eight per day, that law will be held constitutional 
by our courts. It has been decided that a contract for work 
more than eight hours per day in dangerous and unhealthful 
conditions may be constitutionally declared by a state legisla¬ 
ture to be contrary to public policy. 

Factory Legislation. In the United States factory legislation 
relates to a large group of laws concerned with hours of labor in 
factories, stores, mines, etc.; the prohibition of night work; one 
day of rest in each week; exclusion of women and children from 
certain kinds of employment; methods and times of paying 
wages; guards for dangerous machinery; sanitary regulations; 
apprenticeship; discrimination against union men; and sundry 
other requirements. Unless the workers protected are directly 
engaged in interstate or foreign commerce, this legislation is a 
function of the states. Every state in the union has some legis¬ 
lation in regard to conditions in factories, stores, and mines. 

Well-drawn laws relating to safety and sanitary conditions 
in factories are constitutional; they embody a legitimate ex¬ 
ercise of the police power of the state. A child-labor law passed 
by a state prohibiting the labor of children in factories, stores, 
mines, etc., when under a certain age, or at night, or for more 
than a certain number of hours a day, is constitutional. A minor 


THE LAW IN INDUSTRIAL RELATIONS 


319 


is not competent to make a contract; a minor is a ward of the 
state. A federal child-labor law for the purpose of regulating 
child labor uniformly throughout the country is unconstitu¬ 
tional. It interferes with the powers delegated to the states. In 
like manner, state laws relating to hours of labor, night work, 
and working conditions of wage-working women are constitu¬ 
tional ; they are considered to be proper extensions of the police 
power of the state. 

There has been greater reluctance on the part of our courts 
to extend the police power to protect adult male workers. How¬ 
ever, the hours may be limited in hazardous and unhealthful 
industries. Only a few years ago the Supreme Court of the 
United States held that a state law limiting the hours of labor of 
men in factories to ten hours per day, providing for overtime at 
higher wages in emergencies, was constitutional. Compulsory 
minimum wage laws are unconstitutional, except in the case of 
children. A minimum-wage law fixes a point below which money 
wages may not be paid, usually at what is considered to be a 
subsistence wage. Laws aimed at preventing discrimination 
against union men have not stood the test of constitutionality. 

After a well-drafted labor law is passed, its importance de¬ 
pends very largely upon the efficiency of administrative offi¬ 
cials. In nearly all of the states the enforcement of labor legis¬ 
lation is placed in the hands of a labor bureau or an industrial 
commission. A law regarding safety or sanitary conditions 
should be drawn in general terms, leaving to the commission 
and its experts the minute details of regulation under the law. 
Good administration of a poorly drawn law may be an improve¬ 
ment over an excellent law poorly administered. A labor law is 
as strong as the machinery of administration. American legisla¬ 
tures pass too many laws. Better enforcement of laws already on 
the statute books is desirable in the realm of factory legislation. 

Social Insurance. Industrial workers may be protected 
against accident, sickness, old age, and unemployment by other 
means than the inadequate one of charity. These vicissitudes 
may be guarded against either by individual or family action, or 
by group agencies. The older individualistic doctrine placed the 
burden of caring for these contingencies upon the individual or 


320 


ECONOMICS 


upon the family through savings. But it has been found that the 
weaker and poorer individuals, those with a smaller income or 
those who are improvident, do not, or are not able to, provide for 
such contingencies. We are developing a program involving some 
form of group action. This may take one of the three forms: com¬ 
pulsory (state action), union, or employer (corporation) insurance. 

Since only a small percentage of workers are members of labor 
organizations and those usually of the higher income group, and 
since many unions as yet do little to meet the contingencies of 
accidents, ill health, old age, or unemployment, the second plan 
does not seem sufficient. Again, the methods used by unions 
having some form of insurance usually do not meet the approval 
of students of actuarial science. Certain employing corporations 
have adopted insurance and pension features for their employees, 
such as group insurance, medical and dental care, old-age pen¬ 
sions, and the like. Unfortunately, most of these lack a definite 
contractual basis. Some of these plans are used to break the 
power of unions or to tie workers to a company and reduce the 
labor turnover. Many corporations do not provide pensions or 
insurance for their workers. As a rule, only larger and more 
prosperous industries make such provisions. The great majority 
of pension plans are established by railways, public utilities, and 
by corporations in the metal trades. Hence, community action 
providing for compulsory social insurance seems necessary and 
desirable in order that the great mass of workers may be reached 
and the plans put on a definite contractual basis, and in order 
that such plans may not be used either for or against unions. It 
may be more advantageous for unions and unionists to have 
state paternalism than to be dependent upon the paternalism 
or welfare work of private institutions. Social insurance is 
compulsory, governmentally regulated insurance of industrial 
workers against one or more of four contingencies—accident, 
sickness, old age and invalidism, and unemployment. Because of 
rapid technological and administrative changes in industry, un¬ 
employment is likely to loom big for several years. As a conse¬ 
quence more insistent demands for social insurance will be made. 

Workingmen’s Compensation. This form of social insurance 
has found quite general acceptance in the United States. In 


THE LAW IN INDUSTRIAL RELATIONS 


321 


1930 only four states—Arkansas, Florida, Mississippi, and South 
Carolina—adhered to the old employers’ liability system in the 
case of industrial accidents. Under employers’ liability, the legal 
responsibility for an injury to an employee while at work rested 
upon some individual—the employer, a fellow worker, or the 
injured worker himself. The employer could ordinarily be held 
responsible only when it could be definitely proved that he had 
been negligent. To establish a claim, a lawsuit was necessary, 
and the outcome of the suit was very uncertain. Frequently, 
because of appeals and technicalities, awards that were finally 
made to an injured worker or to his family were long delayed. 
A large percentage of the payments actually made by employers 
was absorbed in lawyers’ fees. The average amounts going to 
injured workers and their families were small. Many claims 
were settled out of court, but in such cases, the bargaining 
strength of the injured workers was not sufficient to insure 
adequate pa 5 mients. 

The workingmen’s compensation laws in forty-four states 
differ greatly in details, but the same fundamental principle may 
be found in all. The industry is held to be responsible for the 
compensation of injured employees. Like fire insurance, com¬ 
pensation for injuries becomes an expense of doing business. The 
entire burden is assessed upon the employing firm. The premium 
requirements are such that the firm which introduces safety 
appliances and reduces the accident rate will benefit thereby in 
lower rates for insurance against industrial accidents. Under a 
well-drawn compensation law, it is profitable as well as humane 
to reduce industrial accidents. Prevention of accidents, as well 
as immediate and definite compensation for the accident, is a 
basic principle in a good workingmen’s compensation law. Under 
this plan lawsuits are practically eliminated. Payments for 
injuries are made with a reasonable degree of promptness and of 
definiteness. The amounts paid are usually a percentage of the 
wages for the period of disability or for a specified number of 
weeks in case of death or permanent disability or in case of a 
particular injury, such as the loss of an arm. The percentage of 
»the wages paid during disability varies in different states from 
50 per cent to 66| per cent. The system is supervised by a 


322 


ECONOMICS 


state commission. In some states employers are required to 
insure through a state operated insurance fund; in others, 
mutual or other insurance companies may be used as insurance 
carriers. In certain states a firm whose financial standing is 
excellent may be allowed to make the compensation payments 
directly to the worker or his family. The percentage of wage 
workers covered by the compensation laws varies greatly from 
state to state. As a rule, farm laborers, domestic servants, em¬ 
ployees of concerns employing a few workers, and casual workers 
are denied the protection of workingmen's compensation. Em¬ 
ployers’ liability applies to these groups of workers. 

An adequate compensation law should also include compensa¬ 
tion for industrial diseases. An industrial disease is caused by 
working conditions. For example, an industrial disease may 
result from dust, from particles thrown by emery wheels, or from 
contact with lead products. In the case of an injury which pre¬ 
vents the worker from following his former work or occupation, 
re-training for another job is often feasible. A large percentage 
of the states provide for re-training and re-education of indus¬ 
trial cripples. 

Health Insurance. As yet, no American state has adopted 
health or sickness insurance. This form of social insurance is 
quite common in Europe. The sickness of workers is a more 
frequent cause of broken earnings than accidents. Sickness not 
caused by purely industrial diseases may be due to working con¬ 
ditions, to home conditions, to the habits of the individual, or to 
community conditions. One plan for health insurance would 
divide the expense among industrial workers and their families, 
employing firms, and the general public. Each of the three 
groups would be financially interested in adopting measures 
which tend to reduce the amount of sickness among industrial 
workers. An adequate and workable health-insurance law is 
much more difficult to draft and to administer than one provid¬ 
ing for insurance in case of industrial accidents. 

Old-Age Pensions. Provision for the old age of industrial 
workers may be made by charity, savings, insurance, or pen¬ 
sions. Charity is an undesirable and repulsive makeshift. For * 
the great majority of workers receiving a low wage, voluntary 


THE LAW IN INDUSTRIAL RELATIONS 


323 


saving or insurance sufficient to provide adequate maintenance 
after the work period is ended is difficult of accomplishment. 
And, to the young, old age seems distant and uncertain. Why 
save for such a contingency? Adequate protection against want 
or charity in old age demands for the rank and file of industrial 
workers either an insurance or a pension plan. Such plans may 
be governmental (social) or private. Private plans, whether 
fostered by a labor organization or by an employing corpora¬ 
tion, will not cover all workers. Many do not belong to labor 
organizations, and up to date, few, if any, have adequate ac- 
tuarially sound plans. Only a few corporations have developed 
pension systems for their workers, and, as a rule, such plans 
are not grounded on any definite contractual basis. Almost 
invariably the plan may be ended at any time by the employing 
firm. The conclusion seems inevitable that any adequate pen¬ 
sion or insurance plan for industrial workers must be compulsory 
and governmentally directed. It should be a form of social 
insurance. 

Is a compulsory old-age pension or an insurance plan needed 
in the United States? A competent authority estimated that at 
the end of 1929, 1,800,000 aged persons were dependent upon 
charity or relatives. According to the census of 1890, 738 persons 
out of every 1,000 males, sixty-five years of age or over, were 
recorded as gainfully employed; but thirty years later, in 1920, 
only 615 in 1,000 were gainfully employed—a marked decline 
in a generation. It is reasonable, in view of the rapid changes in 
industry during the period since 1920, to presume that the per¬ 
centage of aged people gainfully employed has further declined. 
But the average expectancy of life is increasing. The following 
official figures indicate that old age is becoming the major cause 
of dependency. 


YEAR 


PER CENT OP TOTAL NUMBER IN ALMSHOUSE 
65 YEARS OP AGE OR OLDER 


1880 

1890 

1904 

1910 

1923 


25.6 
31.8 

40.6 

42.7 

53.8 


324 


ECONOMICS 


The problem of adequate financial protection of the industrial 
worker from the danger of poverty in old age is important and 
too large for private initiative. 

At the end of 1930, eleven states and Alaska had passed old- 
age pension laws. These laws provide in most cases for county 
option as to the adoption of the plan. As a rule, the maximum 
amount allowed is thirty dollars per month. The pension is 
considered to be a form of poor relief to take the place of the 
almshouse. Except in one state, the entire expense of the pen¬ 
sion is borne by the county. In Wisconsin part of the expense is 
paid out of state funds. In order to obtain these meager pensions 
where the plan is actually in operation, the aged dependent must 
be a worthy citizen of sixty-five or seventy years of age who has 
resided within the state for several years and who is in indigent 
circumstances. The federal government has not as yet taken any 
steps toward pensioning the veterans of industry. A law grant¬ 
ing a subsidy toward pensions allowed by a state would aid in 
hastening the general adoption of old-age pension laws by our 
states. It would also aid in standardizing the state laws. These 
state laws all provide for non-contributory pensions. Neither the 
employer nor the employees have been asked to contribute. The 
money is raised by taxation. In fact the costs of maintaining the 
aged in almshouses are as great as the pension allowed under the 
most liberal state laws, but a pension which will keep the aged 
out of the depressing almshouse is certainly a humane measure. 

A contributory insurance plan for old-age protection may be 
theoretically superior to the pension plan. It will not, however, 
aid those who have already reached or are near the time of retire¬ 
ment. “It is also important,” writes John B. Andrews, “to 
remember that contributory plans involve complicated admin¬ 
istrative machinery for the collection of payments and preserva¬ 
tion of records over long periods of time.” And people in the 
United States move frequently from locality to locality and 
from state to state. 

Unemplo 3 nnent Insurance. A properly drawn statute provid¬ 
ing for the insurance of workers against unemployment will aim 
to accomplish two distinct results. (1) The law should penalize 
employing firms which run irregularly. As- in the case of work- 


THE LAW IN INDUSTRIAL RELATIONS 


325 


ingmen’s compensation, prevention should be stressed. (2) Un¬ 
employment insurance will place a moderate income in the 
hands of the unemployed and their families. This will increase 
their purchasing power and help keep the family from pauperi¬ 
zation. No state in this country has, up to date (1930), passed 
an unemployment insurance measure. England and Germany 
insure a large percentage of their workers against unemploy¬ 
ment. The workers as well as the employers in these two coun¬ 
tries contribute toward the insurance fund. In England the 
government adds a subsidy; and, in Germany, the government 
pays the expenses of the system and also provides emergency 
funds. Neither measure furnishes any potent incentive to em¬ 
ploying firms for regularizing their industries. A bill introduced 
into the Legislature of the State of Wisconsin was drawn with 
prevention of unemployment in view. As in the case of compen¬ 
sation for accidents, the employer who ran his plant regularly 
would pay a lower rate into an insurance fund than his competi¬ 
tor who did little to regularize the operation of his plant. A 
definite financial incentive would be given to each employing 
firm to stabilize its business. The bill provided for payment of 
one dollar per day to those unemployed for lack of work, for a 
period not to exceed thirteen weeks in one year. 

Any public unemployment insurance plan confronts two 
obstacles. (1) How can the willingness to work be tested? In 
England and Germany excellent networks of public employ¬ 
ment bureaus have been established. To these the unemployed 
must apply before he becomes eligible to receive unemployed 
benefits. If the bureau cannot find a suitable job, the workless 
person is in line to receive insurance benefits. (2) What is suit¬ 
able employment? Shall a skilled worker out of a job be obliged 
to take one requiring little skill if no other be available, or for¬ 
feit his rights to benefit? In clear cases, the answer is No, but 
in actual practice many border cases will appear to perplex the 
authorities. Any unemployment insurance plan which can be 
well administered must be supplemented by a good system of 
public employment agencies. 

In the clothing industry, under an agreement between a 
union and groups of employers, several plans for private unem- 


326 


ECONOMICS 


ployment insurance are in operation. Both workers and em¬ 
ployers pay into a fund out of which benefits are paid in case of 
unemployment due to lack of work. A few unions pay unem¬ 
ployment benefits to their members. Leeds and Northrup Com¬ 
pany, of Philadelphia, after working out a plan for regularization, 
added an insurance fund to compensate employees who might 
be laid off from time to time because of lack of work. The 
company provides the fund. 

Attitude of Organized Labor toward Labor Legislation. Organ¬ 
ized labor has favored laws regulating child and woman labor, 
but it has been lukewarm in regard to laws limiting the hours 
of labor of men. The spokesmen of organized labor feel that 
more can be accomplished by the pressure of union bodies than 
by legislation. A shorter working day obtained by direct union 
action adds to the prestige of the organization. Organized 
labor favors laws in regard to safety and sanitary conditions in 
factories; it stands for social insurance measures. The limitation 
of the power of judges to issue injunctions is favored. Laws 
aimed at discrimination against union men are, of course, urged. 
Organized labor feels that the judges in our courts are by 
training and experience out of touch with working people and 
inclined to be unsympathetic toward unionism. Labor insists 
that many court decisions would be more favorable to the work¬ 
ing people if the judges had greater opportunity to understand 
the attitude of workers and to sense the dangers—economic 
and otherwise—which confront the workers individually and 
as a class. Organized labor believes that it should be represented 
in administrative bodies having to do with the execution of fac¬ 
tory legislation. Such demands seem reasonable. 

Questions 

1. We have a dual form of government in the United States. Explain. 

2. How is a law declared to be unconstitutional? 

3. Give arguments in favor of a workingmen’s compensation law. 

4. Give arguments for and against an old-age pension for indigent 
industrial workers. 

5. Do you favor a compulsory health insurance law in your state? 
Why? 


THE LAW IN INDUSTRIAL RELATIONS 


327 


References 

Blum, S., Labor Economics, Chs. 3, 4, 5, 7. 

Carlton, F. T., History and Problems of Organized Labor, Ch. 11. 
Catlin, W. B., The Labor Problem, Ch. 21. 

Commons, J. R., and Andrews, J. B., Principles of Labor Legislation, 
The American Labor Legislation Review (issued quarterly). 


CHAPTER XXXI 


PUBLIC EXPENDITURES 

Public Finance. This branch of economics deals with the 
methods of obtaining governmental revenues, their expenditure, 
and the administration of public business. An individual plans 
his expenditures to fit his income, but governmental units 
usually plan for projects requiring expenditures, and, after 
doing so, endeavor to prepare revenue measures, frequently 
supplemented by borrowing, to raise the necessary funds to 
meet the expenditures voted. Well-governed governmental 
units prepare a budget containing careful estimates of the finan¬ 
cial requirements of the different departments of the govern¬ 
ment, and also specific plans for raising necessary funds by 
taxation or by borrowing. The budget is usually prepared by 
the executive or administrative department. It is considered 
and enacted into law, with or without modification, by the 
legislative branch of the government. 

The Increasing Functions of Government. Governments are 
not abstractions. They are managed and directed by fallible 
and often misguided human beings. Good government in a re¬ 
public can only be assured by eternal vigilance on the part of an 
alert and capable electorate. As more and more activities have 
been put into the sphere of governmental control and direction, 
the personnel of the public service has multiplied and the ex¬ 
penditures have steadily mounted to higher and higher levels. 
During the century which has elapsed since 1830, wealth, total 
and per capita, has greatly increased, and governments have 
assumed certain functions which were formerly carried on by 
private enterprise and paid for out of private funds. The tax- 
supported free school system is one such function which now 
demands large public expenditures. In 1830 there were few free 
public schools in the United States. The burden of public ex¬ 
penditures is not excessive in this country, but the expenditures 

328 


PUBLIC EXPENDITURES 


329 


are so considerable and betray such a consistent tendency to in¬ 
crease that extravagance, waste, and inefficiency in public opera¬ 
tions should be reduced to a minimum. Brains, initiative, and 
persistent performance are as essential in the governmental 
service as in private business. Pohtical pull, graft, red tape, 
listless routine, and mediocrity are major ills in the public 
service. 

The oldest function of government is that of protection 
against foreign attacks and internal disturbances. A major frac¬ 
tion of the expenditures of our federal government is for war- 
past, present, and prospective. But an especially significant 
increase in recent decades has occurred because of the taking 
on of “developmental functions—education, public recreation, 
regulation of private business, care of the defective and indi¬ 
gent, and aid given to private industry through research and 
statistical services, such as are carried on by the national and 
state departments or bureaus of commerce, labor, and 
agriculture. 

A striking comparison of the activities of an American city in 
1922 and a half-century earlier has been made by a student of 
municipal affairs. In Detroit, in 1874, approximately a million 
dollars was expended for the conduct of 33 public activities. 
“There were no telephones, auto trucks, germ theories of dis¬ 
ease, psychopathic clinics, aviation fields, sewage disposal 
plants, safety engineers, platoon schools, and streets with 
twelve-inch foundations. The city government was a rather 
simple and inexpensive affair, doing pretty much as cities were 
doing a century, or perhaps even ten centuries, before. . . . 
But the modem city with congestion of population tells a differ¬ 
ent story. “This congestion of population has created new 
needs—traffic control, street widening, ample fire protection, 
additional police, better street lighting, and adequate water- 
supply. Higher standards of living have compelled the mainte¬ 
nance of parks, boulevards, and museums, increased educational 
facilities, libraries, and concerts. Increasing humanitarianism 
has prompted the establishment of playgrounds, better prisons, 
care of the sick, and many activities unknown to citizens 
and officials of a generation ago.” And the old activities are 


330 


ECONOMICS 


more complex and expensive. ^‘In consequence, the per capita 
cost of government in large cities has quadrupled and public 
debts have multiplied. City government, formerly simple and 
cheap, has necessarily grown technical and costly. The new 
city is a great business corporation, employing thousands of 
men and women, owning vast properties, equipment, and sup¬ 
plies; borrowing large sums on credit; and engaging in exten¬ 
sive business for the benefit of the community.’^ ^ 

Growth of Governmental Expenditures. As the functions 
and services of governmental units multiply in this machine 
age characterized by increasing density of population and grow¬ 
ing interdependence, the cost of carrying on the activities of 
government increases. Doubtless there is much of inefficiency 
and waste in the exercise of governmental functions, but with 
efficiency the cost of carrying on the essential functions of gov¬ 
ernment would be on the up-grade. The following tables give 
an indication of the rising cost of government. 


Growth of 

Federal Expenditures in the United States ^ 

TEAR 

TOTAL ORDINARY 

FEDERAL EXPENDITURES 

PER CAPITA ORDINARY 

FEDERAL EXPENDITURBi 

1830 

$15,000,000 

$1.15 

1840 

24,000,000 

1.42 

1850 

39,500,000 

1.71 

1860 

63,000,000 

2.01 

1870 

310,000,000 

8.03 

1880 

268,000,000 

5.34 

1890 

318,000,000 

5.05 

1900 

521,000,000 

6.85 

1910 

694,000,000 

7.52 

1919 

18,952,000,000 

180.75 

1920 

6,142,000,000 

58.10 

1926 

3,063,000,000 

26.30 


(Expenditures for Panama Canal, public debt, and postal 
service omitted.) 


1 Upson, L. D., The American City, November, 1922. 

2 See Adams, H. C., Finance, p. 92; Bye, R. T., and Hewett, W. W., 
Ayylied Economics, p. 445. 


PUBLIC EXPENDITURES 


331 


Growth of State and Local Expenditures ^ 


YEAR 

STATE 

EXPENDITURE 

LOCAL EXPENDITURE 

(146 cities) 

1915 

$494,907,000 

$996,062,000 

1919 

640,403,000 

1,113,600,000 

1922 

1,280,320,000 

1,984,322,000 

1925 

1,614,562,000 

2,549,149,000 


Expenditures op Four Large Cities 2 

1915 1919 1922 

per per per 

CITY TOTAL CAPITA TOTAL CAPITA TOTAL CAPITA 

New York $244,563,000 $45.85 $245,963,000 $44.81 $389,276,000 $66.66 
Chicago 81,446,000 33.97 96,222,000 26.22 163,080,000 57.56 

Cleveland 26,345,000 41.20 29,958,000 39.29 59,039,000 69.09 

Los Angeles 25,511,000 56.42 25,140,000 45,58 61,822,000 99.34 

The expenditures of European countries have followed about 
the same course as those of the United States. It has been esti¬ 
mated that the public expenditures of European nations in¬ 
creased from $955,000,000 in 1830 to $3,600,000,000 in 1890— 
an increase of 360 per cent in sixty years. The increase in ex¬ 
penditures per capita was from about $4 in 1830 to over $11 in 
1890.^ The World War placed extraordinary burdens upon nearly 
all European countries. 

Purpose of Public Expenditures. The following table, based 
upon estimates of the National Industrial Conference Board, 
presents in some detail the functional distribution of expendi¬ 
tures made in 1926 by the federal and the state and local 
governments.^ 

1 Keezer, D. M., Cutler, A. T., and Garfield, F. R., Problem Ecmomics, 
p. 586. 

2 Hunter, M. H., Outlines of Economics (rev. ed.), p. 26. 

2 Adams, H. C., Finance, pp. 86-87. 

^ Cost of Government in the U. S., p. 11; Ely, R. T., Outlines of Economics, 
(5th ed.), p. 743. 


332 ECONOMICS 


PURPOSE OF EXPENDITURE 

FEDERAL 

STATE AND LOCAL 

General Government 

$354,800,000 

$515,100,000 

Protection 

1,363,400,000 

720,100,000 

Education 

15,600,000 

2,242,900,000 

Highways 

102,600,000 

1,544,600,000 

Economic Development 

151,700,000 

64,100,000 

Social Welfare 

71,400,000 

981,400,000 

Miscellaneous 

2,200,000 

158,700,000 

Public Utilities 

169,600,000 

487,300,000 

Debt Redemption 

873,100,000 

337,600,000 

Interest 

831,900,000 

639,500,000 

Total 

$3,936,300,000 

$7,691,300,000 

The National Bureau of Economic Research estimates (1930) 

that all governmental units 

in the United States spend about 

$3,500,000,000 annually for public works. 


More detailed statements 

in regard to the expenditures by 

governmental units of the State of Ohio are presented in the 
following tables. Ohio has nearly 4,700 governmental units 
expending funds. In 1926 their expenditures, including those 
made by publicly operated utilities, amounted to $422,200,000, 

divided as indicated below. 

1 



AMOUNT 

PERCENTAGE 

State 

$49,022,000 

11.6 

Counties 

88,848,000 

21.0 

Townships 

8,855,000 

2.1 

Cities 

135,209,000 

32.1 

Villages 

14,020,000 

3.3 

School Districts 

126,250,000 

29.9 

Total 

$422,204,000 

100.0 


These totals of state and local expenditures and of city expend¬ 
itures were divided according to governmental purposes as in¬ 
dicated in the next two tables. 

^ The Ohio Citizen, March 27, 1928, issued by the Ohio Institute. 






PUBLIC EXPENDITURES 


333 


Expenditures op Ohio, 1926 



AMOUNT 

PERCENTAGE 

General Government 

Protection to Person and Prop- 

$25,702,000 

6.1 

erty 

25,758,000 

6.1 

Agriculture and Conservation 

3,618,000 

0.9 

Highways 

101,392,000 

24.0 

Sanitation 

19,467,000 

4.6 

Health 

8,420,000 

2.0 

Public Welfare 

19,400,000 

4.6 

Education 

129,205,000 

30.6 

Recreation 

3,891,000 

0.9 

Miscellaneous and Undistributed 

6,687,000 

1.6 

Public Utilities 

32,290,000 

7.6 

Interest 

46,374,000 

11.0 

Total for Ohio 

$422,204,000 

100.0 

Expenditures of Ohio Cities, 1926 



AMOUNT 

PERCENTAGE 

General Government 

Protection to Person and Prop¬ 

$6,812,000 

5.1 

erty 

19,789,000 

14.6 

Highways 

32,978,000 

24.4 

Sanitation 

14,864,000 

11.0 

Health 

3,672,000 

2.7 

Public Welfare 

Education (Universities and Li¬ 

1,085,000 

0.8 

braries) 

2,626,000 

1.9 

Recreation 

2,824,000 

2.1 

Miscellaneous 

3,011,000 

2.2 

Public Utilities 

24,632,000 

18.2 

Interest 

22,916,000 

17.0 

Total Expenditures 

$135,209,000 

100.0 

Public Debts. The major fraction of all public 

debts is in- 


curred because of extraordinary expenditures in times of war, 
or for the building of various kinds of public works, such as 
roads, canals, public buildings, and utilities operated by public 
authorities. In this country the debts of the federal govern- 






334 


ECONOMICS 


ment have been incurred because of war. The state and local 
debts have been incurred mainly for public works and buildings, 
and for commercial enterprises, such as municipal waterworks. 
During war time the federal government has always resorted 
to borrowing in order to supplement increased taxation. The 
War of 1812, the Mexican War, the Civil War, the Spanish- 
American War, and the World War represent peaks in federal 
expenditures. After each war period the government has prac¬ 
ticed debt reduction. Immediately prior to the World War 
the federal indebtedness amounted to approximately $1,000,- 
000,000. The exigencies of the War carried the debt to the 
unprecedented height of over 25 billions of dollars. Of this 
huge total, however, nearly 10 billions of dollars were loaned to 
the allied countries. On June 30, 1925, the interest bearing debt 
had been reduced to approximately 20 billions of dollars. 

The indebtedness of the American states is relatively small, 
but the sum total has increased materially in recent years. In 
1926 the total debt for 250 American cities having a population 
of over 30,000, was $7,284,457,950, and the funded (bonded) 
debt was $6,376,280,272. The funded debt of the 250 cities 
amounted to $183.73 per capita.^ In 1919 the gross debt of 227 
cities of over 30,000 population was nearly $4,000,000,000, or 
$113 per capita.^ Between 1912 and 1922 the total debt of 
the federal government increased 762 per cent; of the states and 
local governments, 163 per cent.^ 

Public officials and legislators are prone to yield to the temp¬ 
tation to use the credit of the government for funds instead of 
increasing the rate of taxation. Later, interest and repa 5 rment 
of the debt will demand higher tax levies, but that burden may 
be met by a new administration. In certain cities the funded 
debts have become excessive. It will be recalled that in 1926 
the various governmental units in Ohio spent 11 per cent of 
their money in interest payments. A federal or state bond is 
merely an interest-bearing promise to pay a specified sum at 
some future date, and the owner cannot, without the consent 
of the governmental authorities, sue for payment in case of 

1 Financial Statistics of Cities, pp. 59, 408. 

2 Jensen, J. P., Problems of Public Finance, pp. 465, 467. 


PUBLIC EXPENDITURES 


335 


default. The security back of a governmental bond is the credit 
and financial integrity of the government, backed by the right 
to tax the persons and property within the jurisdiction of the 
governmental unit concerned. In this respect public bonded 
indebtedness differs markedly from mortgage bonds issued by 
private corporations. 


Questions 

1. How would you determine whether there has or has not been an 
increase in the real burden of public expenditures in your state? 

2. Should a governmental unit make plans for paying its indebtedness? 

References 

Bye, R. T., and Hewett, W., Applied Economics, Ch. 21. 

Ely, R. T., et al., Outlines of Economics (5th ed.), Ch. 34. 

Hunter, M. H., Public Finance. 

Jensen, J. P., Problems of Public Finance. 

Lutz, H. L., Public Finance, Pt. 5. 


CHAPTER XXXII 


PUBLIC FINANCE 

Sources of Public Revenue. With the rapidly increasing 
expenditures of governmental units, the problems centering 
around justice in distributing the burdens incident to obtaining 
the revenues necessary to meet expenditures become of growing 
importance. The chief sources of public revenues may be classi¬ 
fied as follows: ^ 

1. Direct Revenue: 2. Derivative Revenue: 


(a) From Public Domains 

(a) Taxes 

I. Sale of Land 

lb) Fees 

II. Sale of Products 

(c) Assessments 

(b) Public Industries 

(d) Fines and Penalties 

(c) Gifts 


(d) Confiscations and Indemnities 



3. Anticipatory Revenues: 

(a) Sale of Bonds and Short-Time Notes 

(b) Issuance of Paper Money 


Direct revenue is obtained from the business operations of the 
government. The chief source of governmental incomes of 
modern nations is derivatory, and the most important of the 
derivatory sources is taxation. The debts assumed under antic¬ 
ipatory revenues are later to be paid out of direct or derivatory 
revenue. 

Definitions. The prime source of income of a modern govern¬ 
ment is taxation. A tax is a compulsory contribution levied by 
governmental authority without regard to individual benefits 
derived therefrom. A fee is a payment covering the cost of some 
governmental service which is of actual or assumed special 
benefit. The pa3mient for recording a deed or a mortgage is a 
fee. It is supposed to pay the cost of the service, and the record¬ 
ing of the deed or mortgage affords special protection or benefit 
1 Adams, H. C., Finance, p. 227. 

336 


PUBLIC FINANCE 


337 


to the holder of the document. A special assessment is used in 
the United States chiefly in payment for the construction of 
pavements, sidewalks, and sewers. The cost of the improvement 
is allotted to the owners of the real estate which is beneflted. 
Usually this is conflned to the property on both sides of the 
street paved or on which sidewalks are built. In the case of 
sewers, the cost may be spread over a wider territory. A special 
assessment is a compulsory contribution equal to the cost of the 
improvement and presumably levied according to special bene¬ 
fits derived from the improvement. 

A pubhc price is a price paid for commodities, such as timber, 
sold by a governmental unit in competition with private firms. 
The element of compulsion is missing. A rate required for 
water furnished by municipal water works or for postage by the 
United States Post Office usually is very closely related to the 
fee. If the individual receives the service, he must pay a defi¬ 
nite rate which ordinarily covers the cost. However, the post 
office or a municipal utility publicly owned and operated might 
charge rates which would yield a large profit. In this event, the 
contribution would approach the field of taxation. 

A direct tax is one levied so that the person paying the tax to 
the governmental officials actually bears the burden of the tax. 
An indirect tax is one in which the burden is, or may be, shifted 
to another. A tariff duty often raises the price of the article 
imported by the amount of the duty. In that case, the tax is 
shifted from the importer who pays the governmental officials 
to the consumer through the medium of higher prices for the 
article upon which the duty is imposed. Customs duties and in¬ 
ternal revenue taxes are forms of indirect taxes. A net income tax 
is a direct tax. It cannot be shifted; the incidence of the tax is 
upon the person who actually pays the tax. In the case of the 
tariff duty, mentioned above, the tax is shifted; its incidence is 
upon the consumer. Sometimes a tax can be partially shifted. 

Justice in Taxation. Since fees, special assessments, public 
rates, and public prices are minor sources of public revenues, 
and since special benefits are involved, the problem of fairness 
is rarely considered in connection with these sources of revenue. 
Taxation, however, constitutes considerable direct and indirect 


338 


ECONOMICS 


burden upon the citizen without the solace of direct individual 
benefit. To levy taxes justly is a problem which must be faced. 
In actual practice expediency plays a large role in determining 
the kind of taxes that shall be levied. A tax which must be 
paid to governmental officials in a lump sum annually or semi¬ 
annually is not easily accepted. Its burden is clearly visible, 
but if the tax is levied upon the sale or importation of an article 
and appears unrecognized in the price every time a unit of 
the commodity is purchased, few notice the tax. The pocket- 
book is opened frequently, gently, and almost painlessly. This 
indirect or unseen tax is dear to the heart of the legislator who 
looks forward to re-election. 

Theoretically, it is quite generally assumed that taxes should 
be levied in accord with the ability to pay. Much difficulty and 
confusion arise when we are required accurately to measure the 
ability to pay. Ordinarily it is assumed that income or property 
is the basis for determining one’s ability to pay taxes. Should 
the tax rate be the same whether a person has a large or a small 
income or amount of property, or should the rate increase or 
decrease with the amount of the income or property? In techni¬ 
cal terms, should rates be proportional, progressive, or regres¬ 
sive? The customary answer is that justice requires the rate to 
be progressive. A person having an income of $50,000 per year 
should pay a higher rate than one having an income of $5,000. 
If the rate is 5 per cent for an income of $5,000, it should be, 
say, 10 per cent for an income of $50,000. However, no definite 
criterion has been generally accepted for the accurate measure¬ 
ment of ability to pay. Generally speaking, income taxes in the 
United States are progressive, but property taxes are propor¬ 
tional. Expediency in the form of difficulty in collection mili¬ 
tates against an extremely high progressive income tax. It is 
much more difficult to prevent evasion in the case of a 50 per 
cent income tax than in the case of a tax of 5 per cent. 

Tests of a Good System of Taxation. Adam Smith in his 
famous book. The Wealth of Nations^ developed four famous 
canons in regard to taxation: 

1. Every citizen should contribute to the support of govern¬ 
ment in proportion to ability to pay. 


PUBLIC FINANCE 


339 


2. Taxation should be definite and not arbitrary. ^^The time 
of payment, the manner of payment, the quantity to be paid 
ought to be clear and plain to the contributor, and to every 
other person.” 

3. Payment of taxes should be required at convenient places 
and times. 

4. Taxes should be devised which are easy to collect and ad¬ 
minister. A large fraction of the payments should not go to pay 
the expenses of collection and administration. 

The General Property Tax. The general property tax has 
been the chief source of revenue for American states and local 
governmental units. It is a tax, as its name implies, upon all 
kinds of real and personal property. In colonial and pioneer 
days, when nearly all property was in the form of real estate and 
tangible personal property, this tax was fairly equitable, but 
today it is distinctly bad. Certain of the states more progressive 
in tax matters have eliminated or reduced the use of the general 
property tax for state purposes, but it is quite generally used as 
a significant source of city, county, township, and school-district 
revenue. The general property tax may be condemned in theory 
and in practice. However, there is little indication that its use 
will not be continued by the local taxing districts. 

The general property tax does not conform to the theory of 
ability to pay. The person receiving a large salary is not taxed 
unless he also owns taxable property. The assumption is made 
that property, whether it does or does not bring in an income, 
measures ability to pay. Whether a taxpayer’s property is 
considerable or little, the tax rate is the same. Intangible 
property, such as mortgages, bonds, and corporation stock, is 
taxable in the hands of the owner, and the property mortgaged, 
or that represented by the stock, may also be taxed where 
located. The farm may be taxed and the mortgage also. In case 
of a partnership, the property is taxed; but organize the business 
as a corporation, and, unless the stock is specifically exempted 
from taxation, the taxing authorities will proceed to tax both the 
business property and the stock. Obviously the latter is merely 
a claim to the former. Intangible property is easily concealed. 
In most states where the old and unmodified form of the general 


340 


ECONOMICS 


property tax continues to prevail, a large percentage of the 
intangible property is never reported for taxation. As a conse¬ 
quence, the general property tax usually becomes one upon real 
estate and certain forms of tangible personal property, such as 
cattle, tractors, automobiles, and household furniture. Gross 
inaccuracies in assessing real estate and personal property have 
been all too common. 

In certain states a classified property tax has been tried. The 
tax rate is placed quite low for intangible personal property, 
higher for tangible personal property, and still higher for real 
estate, which cannot easily be concealed. After adopting a classi¬ 
fied tax plan, additional amounts of intangible property usually 
appear upon the records of the taxing authorities. If the general 
property tax is retained, it should be used for local revenues 
only, and better assessing methods and more capable assessors 
should be utilized. Either it should fall upon real estate only or a 
classified system should be adopted. The advocates of “the single 
tax’^ propose to tax only the income from land, and would take 
all of land rent. This plan is, however, a reform rather than a 
purely fiscal measure. ^ There is merit in going so far on the road 
toward the single tax as to tax buildings, machinery, and other 
forms of capital at a lower rate than land. Under the present 
methods we penalize quite heavily the man who builds a new 
home or apartment house, but if he allows the vacant lot he owns 
to grow billboards and burdocks, we are lenient in local taxation. 
To reverse this traditional program would be not undesirable. 

The Income Tax. The income tax is now used by the federal 
government and by sixteen states. Its use in foreign countries is 
quite general. The income tax is theoretically a good tax; it 
squares with the generally accepted theory of ability to pay. 
Progressive rates are ordinarily applied. The federal government 
considers as income only the actual receipt of payments. The 
owner of a house living in it is not considered to be receiving an 
income therefrom. The tax is assessed by the federal authorities 
through personal declaration under oath, checked in certain 
cases by information at the source of payments, in regard to 
salaries and interest payments on bonds. 

^ See Chapter on Proposals for Economic Reform. 


PUBLIC FINANCE 


341 


The Inheritance Tax. The inheritance tax is levied on the 
transfer of property to heirs upon the death of the owner. The 
federal government and a large number of .American states levy 
such a tax. The former levies upon the estate as a whole, while 
the states levy upon the inheritance going to an heir. The tax is 
usually progressive from two points of view—the larger the 
estate or the inheritance the higher the rate, and the more dis¬ 
tant the relationship of the heir to the deceased, the higher the 
rate. Exemptions of varying amounts are also allowed. This 
tax is easily collected; is not, except in special cases, burden¬ 
some; cannot easily be evaded; cannot be shifted; and the in¬ 
come, in the case of a large taxing unit, is fairly definite and 
regular. Under the present federal law credit up to 80 per cent 
of the amount due may be allowed for payments of a state in¬ 
heritance tax. This provision has greatly reduced the federal 
revenues derived from the estates tax. 

Excise Duties. Excise duties, or internal revenue duties, are 
levied upon the production or sale of certain commodities. In 
peace times excise duties are usually levied upon only a few 
commodities or processes. In this country taxes on liquors and 
tobacco have furnished the major portion of the revenues from 
excises. In times of war the number of commodities taxed has 
been multiplied. These duties are usually collected by means 
of a stamp which is placed on the container and which must be 
broken before the container is opened. If the article is sold with¬ 
out the stamp being affixed that is evidence of evasion. The tax 
is ordinarily shifted to the purchaser in higher prices. As it is 
paid every time a purchase is made, the tax is not as a rule con¬ 
sidered burdensome. When the articles taxed are few in number 
and are commodities widely used, the tax becomes a fairly re- 
hable and considerable source of revenue. As in the case of 
tariff duties, an internal revenue tax may be used to modify 
consumption and industry. The internal revenue tax on the 
issuance of paper money by state banks was not intended to be 
a revenue measure. It was passed for the purpose of forcing 
state banks to desist issuing bank notes. An internal revenue 
tax on phosphorus tipped matches was also intended to be 
prohibitive. 


342 


ECONOMICS 


Tariff Duties. A tariff for revenue only, placed upon a few 
articles which are generally demanded and which are imported, 
is in times of peace a fairly reliable source of governmental in¬ 
come. But a tariff which combines protection and revenue is 
much less desirable from a purely fiscal point of view. In time 
of war, when foreign trade is interfered with, a tariff duty be¬ 
comes unreliable as a source of revenue. 

Poll Tax. A poll, or head tax, is levied upon each individual 
in a certain group or community. It is usually levied at a pro¬ 
portional rate. Obviously, when levied as a flat rate, it has no 
direct relation to ability to pay. A few states use it as a necessary 
qualification for casting a ballot. The poll tax is of minor im¬ 
portance in the United States. 

Corporation Taxes. The corporation is often subjected to a 
heavier burden of taxation than is the partnership. The follow¬ 
ing forms of taxation are used in taxing corporations: 

Incorporation tax or fee 
Taxes on the stocks and bonds 
Gross receipt taxes 
Net income taxes 
Franchise tax 

The incorporation fee or tax is paid once only. It is paid when 
the corporation is incorporated. The payment is for the privi¬ 
lege of obtaining articles of incorporation. States in which the 
old general property tax law is on the statute books try to tax 
the tangible property of the corporation where it is located, 
and also the stocks and bonds of the corporation as the personal 
property of the taxpayers. In this fashion, the owner of cor¬ 
poration securities may suffer double taxation as compared with 
a partner in a partnership. The property of a partnership would 
be taxed where the business and property are located. A cor¬ 
poration should either be taxed upon its property and the stocks 
and bonds in the hands of the owners be exempt, or it should 
be taxed upon the market value of the stocks and bonds and its 
tangible property exempted. The gross receipts tax has been 
applied to certain corporations in place of the general property 
tax. It is not a fair tax unless there is a clear parallelism be- 


PUBLIC FINANCE 


343 


tween net and gross income, but the gross income of the typical 
corporation can be ascertained much more easily and accurately 
than the net income. The latter, however, squares with the 
ability-to-pay theory. The net income tax levied upon a corpora¬ 
tion is theoretically a good tax, but the administrative diffi¬ 
culties are many. The federal government now levies an income 
tax on the net income of a corporation. A franchise 4ax is levied 
upon corporations, such as public utiUties, which are granted 
franchises to use the streets of cities and towns. If a successful 
corporation is allowed to charge rates in a monopolistic fashion, 
it will realize more upon its investment than would be made 
under competitive conditions. This extra return capitalized 
gives a valuation to the franchise granted by the state or the 
municipality. Regulation carried out so as to allow only an 
adequate return upon the investment will eliminate monopoly 
profits and the franchise value will be reduced practically to 
zero. 

The Federal System of Taxation. Our federal government 
depends chiefly upon four means of income—the income tax, 
internal revenue or excise duties, tariff or customs duties, and 
the inheritance tax. Unlike individuals, governmental units 
decide upon the expenditures necessary for the year or the 
period under consideration, and if the expenditures are esti¬ 
mated, an attempt is made to provide adequate sources of 
revenue. This process is budget-making. Previous to 1913 the 
revenue of the federal government came chiefly from tariff 
duties and internal revenue taxes on liquors and tobacco. Since 
the adoption of the income-tax amendment to the constitution, 
the income tax has become of increasing importance as a source 
of federal revenue. Nearly two-thirds of the federal tax revenues 
were received in 1928 from the corporation and the personal in¬ 
come tax. The estates tax contributed less than 2 per cent. The 
remainder was about equally divided between customs duties 
and the various forms of excise taxes. A clause in the Federal 
Constitution forbids the levy of a direct tax, such as a property 
tax, unless apportioned among the states in proportion to popu¬ 
lation. For example, if the federal government decides to raise 
$200,000,000 by a property tax, the fraction of the total to be 


344 


ECONOMICS 


raised in any state would be determined by the ratio of its popu¬ 
lation to the total population of the nation. Apphed in this man¬ 
ner, the tax is unfair and difficult to collect. The federal govern¬ 
ment has levied the direct tax on property only five times in 
our history. The last attempt was made during the Civil War. 
The federal authorities are able to levy an income tax directly 
since a constitutional amendment was adopted in 1913 which 
provides: ‘‘The Congress shall have power to lay and collect 
taxes on incomes from whatever source derived without ap¬ 
portionment among the several states and without regard to 
any census or enumeration.” Nevertheless, up to date, interest 
on state and local bonds and salaries of state and local officials 
are exempted from the provisions of the federal income tax. 

State and Local Taxation. Under our Federal Constitution the 
systems of taxation of the federal and the state governments 
will of necessity be dissimilar. For example, the states cannot 
levy export or import duties, and the federal authorities, as has 
been indicated, are practically obliged to abstain from using 
the general property tax. Within the limitations imposed by 
the Federal Constitution, each state may frame its own system 
of state and local taxation. There is consequently fittle of uni¬ 
formity and coordination. In certain cases unfair duplication 
of levies by two or more states upon the same property or in¬ 
come occurs. In practically all states the backbone of the 
local scheme of taxation is the general property tax, and in 
many of the states, the revenues of state government itself are 
derived from the same tax. In recent years there has been a 
considerable tendency to supplement the general property tax 
by other forms of taxation, such as the inheritance tax, the 
income tax, taxes upon corporations, and license payments. All 
states now levy a gasoline sales tax, the proceeds of which are 
usually devoted to building and maintaining good roads. The 
total receipts from taxes, special assessments, fines, etc., of 
American cities having a population of over 30,000, was, in 
1926, $2,125,421,456. Of this total, $1,900,850,097 was obtained 
through taxation; $1,747,163,136 was the contribution of the 
general property tax.^ Of the total revenue receipts of the state 

1 Financial Statistics of Cities (1926), p. 208. 


PUBLIC FINANCE 


345 


and local governments in Ohio, 70.42 per cent was received in 
1925 from the general property tax.^ Of the state revenue re¬ 
ceipts, 7.54 per cent were derived from the general property 
tax. 

The following tables, derived from statistics furnished by 
the federal government, disclose the sources of income of state 
and municipal governments and the increase in total revenue 
per capita in recent years. 


Per Capita Receipts of States 


YEAR 

TOTAL 

GENERAL 

SPECIAL BUSINESS 

POLL 

EARNINGS 

ALL 



PROPERTY 

TAXES 

AND 

TAXES 


OTHERS 



TAX 


LICENSES 




1915 

$ 4.60 

$1.89 

$0.84 

$0.95 

$0.03 

$0.51 

$0.43 

1923 

11.38 

3.22 

2.00 

3.09 

0.06 

1.11 

1.90 


Per Capita Receipts of Municipalities 


YEAR 

TOTAL 

GENERAL 

OTHER 

SPECIAL 

EARNINGS 

ALL 



PROPERTY 

TAXES 

ASSESS¬ 

OF EN¬ 

OTHERS 



TAX 


MENTS 

TERPRISES 


1915 

$30 .00 

$18.73 

$2.36 

$2.54 

$3.03 

$3.34 

1923 

54.78 

36.27 

2.94 

2.92 

5.68 

6.97 


The Burden of Taxation. The increasing expenditures of 
governmental units demand augmented revenues derived from 
old or new sources. The burden of a taxing system is difficult 
to measure accurately. A people with large per capita incomes 
can easily bear without great sacrifice a high rate of taxation. 
Taxes which fall upon the receivers of small incomes may con¬ 
stitute grievous burdens, while taxes levied on the progressive 
principle may not seriously discommode individuals receiving 
large incomes. The following statistical tables will aid in pictur¬ 
ing the growing volume of taxation. According to the first table, 
it will be noticed that the state and local taxes which are not 
directly affected by war steadily increase. 

1 The Ohio Citizen, January 10, 1928, p. 5. 


346 


ECONOMICS 


Volume op Taxation in the United States ^ 



(in 

MILLIONS OF 

dollars) 



taxing unit 

1890 

1913 

1921 

1924 

1926 

Federal 

$374 

$668 

$4905 

$3193 

$3207 

State 

96 

307 

783 

1017 

1264 

Local 

405 

1219 

3150 

3611 

4084 

Total 

$875 

$2194 

$8838 

$7821 

$8555 


During the same period the estimates of the percentages of 
the total national income taken by means of taxation show that 
an increasing fraction is absorbed by governmental units in the 
form of taxes. 2 

Percentages Taxes Are of the National Income 
year federal state local 

1890 3.1 0.8 3.3 

1926 4.1 1.6 5.2 

An estimate of the burden of taxation in other countries is 
presented below. 

Percentages Total Taxes Are of the National Income ^ 


country 

1913-14 

1925-26 

Great Britain 

11.2 

24.0 

France 

13.3 

30.0 

Italy 

12.8 

25.0 

Belgium 

7.8 

17.0 

United States 

6.4 

11.0 


In the State of Ohio during a period of eighteen years, ending 
1928, the population increased 1.38 times; the value of taxable 
property, 5.4 times; general property tax levies, 4.4 times; and 
special assessments, 11.7 times.^ 

^ Cost of Government in the U. S., 1925-26, pp. 70, 76, issued by the 
National Industrial Conference Board. 

2 Ibid., p. 77. 

2 Fisk, H. E., Inter-Ally Debts to the U. S., p. 82. 

^ Bulletin of Ohio Chamber of Commerce, May, 1929. 




PUBLIC FINANCE 


347 


Questions 

1. What is the general property tax? 

2. Do you favor a progressive or a proportional income tax? Why? 

3. Why does the tax burden tend to increase? 

4. What is a good tax? 

5. What happens when a tax is shifted? What is the incidence of a tax? 

References 

Adams, H. C., Science of Finance. 

Hunter, M. H., Outlines of Public Finance. 

Jensen, J. P., Problems of Public Finance. 

Lutz, H. L., Public Finance. 

Plehn, C. C., Introduction to Public Finance. 


CHAPTER XXXIII 


PROPOSALS FOR ECONOMIC REFORM 

Reform Movements. For ages men have been eagerly search¬ 
ing for ways and means of bettering conditions here and now. 
Utopia builders have been a multitude. With fanatical zeal 
they have urged particular modifications in the social or the 
economic structure of their time as panaceas for all the ills 
which afflicted the people. Many and different Utopias, from 
Plato’s Republic to Bellamy’s Looking Backward, have been for¬ 
mulated by dreamers and thinkers of a variety of mental caliber 
and imaginative capacity.^ The United States has been favored 
with its share of social reformers. In this chapter some of the 
noteworthy attempts at economic reform will be briefiy out¬ 
lined. Any reform program which has a chance of successful 
realization must take into account the facts and forces of human 
nature; it must appeal to incentives which make for efficiency. 
Many reform movements point eagerly toward ease, plenitude, 
and quietude as the goals of human endeavor. It is probable 
that this view is based on an incorrect interpretation of human 
nature. Normal people are attracted by adventure, by struggle 
against obstacles, and by opportunity to attract the attention 
and approbation of fellowmen. 

A Chart of Reform Movements. Reform movements may 
be graphically presented as to their attitude toward individual¬ 
ism or collectivism. The extreme of individuahsm may be 
represented as one pole of a magnet and collectivism as the 
other pole. The two poles have one element in common—both 
vigorously attack the present order. While the various groups 
nearer the middle of the chart accept the capitalistic order, 
they desire to bring about certain changes which they assert 
will make for improvement and for social harmony. 

^ See the writer’s Organized Labor in American History, pp. 8-9. 

348 


PROPOSALS FOR ECONOMIC REFORM 


349 


Individualism Anarchism 
Syndicalism 

The Single Tax 

Liberalism 

Conservatism 


Progressivism 

A Program for Industrial Coordination 

State Socialism 
Guild Socialism 
Marxian Sociahsm 
Utopian Sociahsm 
Bolshevism 

Collectivism Communism 


Anarchism. The anarchists wish to put an end to all coercive 
governmental authority. All united or cooperative endeavor 
would be purely voluntary under a system of anarchism. The 
American pioneer who pushed into the wilderness far from the 
centers of population was impatient of governmental interference 
or regulation; he was almost invariably an extreme individualist. 
The anarchist has turned his eyes toward the past. He ardently 
wishes for a return to a condition which was feasible before 
modern industry and trade developed and before dense popula¬ 
tions appeared. To the anarchist all governmental regulations, 
even those clearly in the interest of general welfare, reduce 
human liberty. 

Syndicalism. Syndicalists also repudiate political govern¬ 
mental authority. They would destroy the present forms of 
government and in their place put some not very clearly out¬ 
lined form of industrial organization controlled by the workers 
in each branch of industry. In the United States the Industrial 
Workers of the World may be classified as syndicalists. This 
restless and individualistic group would bring about a break¬ 
down of the present order by means of strikes, sabotage, or 
violence. The anarchists and syndicalists are vehement in their 


350 


ECONOMICS 


denunciation of things as they are, but they are not clear as to 
constructive policies. The ethics of the anarchists and the 
syndicalists are very different from the ethics of the middle 
class. The syndicalists do not believe in democracy, the ballot 
box, or private property rights. They scornfully reject practi¬ 
cally all the concepts which the conventional middle-class man 
holds sacred or desirable. 

The syndicalists and other ultra-radicals are the product of 
disillusionment. Representative government, the ballot box, 
and various economic reform movements have failed to bring 
into existence the Utopia which the ultra-radicals and the poor 
have dreamed about. Dissatisfied with slow progress toward the 
elimination of poverty and the uplift of the masses, they have 
become hostile toward the employing group, the middle class, 
and the present form of government. The ultra-radical is a 
revolutionist. He nurses the hope of an immediate social up¬ 
heaval. He is impatient of all slow step-by-step progress toward 
the betterment of mankind. 

The home owner and the man with a savings account are not 
easily led into the ways of the revolutionist. If the great major¬ 
ity of the men and women of our country are to retain the ideals 
of the middle class and its concept of property rights and busi¬ 
ness methods, more must be allowed to become property owners 
and excessive concentration of wealth must be stopped, whether 
by profit sharing or somewhat similar plans, by the taxation of 
land values or the progressive taxation of incomes and of in¬ 
heritances, by the regulation or the nationalization of monopo¬ 
listic businesses, or by a combination of two or more of these 
plans, or by some entirely different method. To continue to 
produce additional propertyless workers and a few billionaires, 
and to continue to squeeze the middle class between the two, 
means sooner or later, but certainly, industrial and pofitical 
chaos. 

The Single Tax. The single tax is a land reform measure. Its 
advocates assert that poverty and monopoly will disappear 
under the rule of the single tax. AU land rent would be taken 
by the government in the form of a tax. No other form of taxa¬ 
tion would be allowed. Improvements on land, such as build- 


PROPOSALS FOR ECONOMIC REFORM 


351 


ings and fences, would be exempt. There would be no tariff 
duties, internal revenue taxes, income or inheritance taxes. 
Speculation in land would end, vacant property would no longer 
be held out of use for speculative purposes, and land values 
would be reduced to the vanishing point. Rights to improve¬ 
ments on the land would continue to be bought and sold. Deeds 
giving the right to the use of land and improvements would be 
used under the single tax. No sweeping changes in government 
are contemplated by single taxers. If the single tax program 
were adopted, its advocates assert that competition would not 
be destroyed, but would be continued under fair conditions. 

The great American advocate of the single tax was Henry 
George. In 1879 Progress and Poverty was printed. In it, Henry 
George insistently asked why, with progress, does poverty 
continue? In Henry George’s mind poverty persisted because 
of the private receipt of land rent and the consequent specula¬ 
tion in land. Preceding Henry George, another type of Ameri¬ 
can land reformer was very vociferous. The land reformers of 
the forties and fifties of last century demanded (1) equality in 
the quantity of land owned by individuals or families, and (2) 
that land ownership should be inalienable. 

A not inconsiderable number of conservative business men 
are quite willing to go some distance on the road mapped out 
by Henry George. A reduction in the tax on improvements and 
machinery would lower the penalties assessed by the tax collec¬ 
tor on business activities. Land is not produced. Its quantity 
will not be reduced or increased by changes in the tax rate. Why 
should the man who builds a fine residence be severely penalized 
in taxes for so doing while the owner of a near-by vacant lot 
pays little? By placing an added tax on land and reducing or 
eliminating the taxes on buildings, landowners would be stimu¬ 
lated to build more buildings. When landlords compete for 
tenants, the poor and insanitary buildings will be without 
tenants. Many persons can see desirable features in reducing 
the tax burdens on improvements and placing them to a larger 
degree upon land. Certain provinces and cities in Western 
Canada have untaxed buildings, and Pittsburgh and Scranton 
under a state law have partially untaxed buildings. 


352 


ECONOMICS 


Liberalism. A liberal in the field of economics emphasizes 
freedom rather than compulsion on the part of government. He 
believes that the rule of the majority may be tyrannical. How¬ 
ever, the liberal would not, as would the anarchist, eliminate 
the functions of government. He would use a minimum of gov¬ 
ernmental authority in order to make it easy for men to adopt 
programs which tend toward greater equality of opportunity 
for all. The liberal favors the protection of the weak from an 
economic point of view by means of child-labor legislation, 
minimum wage laws, and social legislation; he favors an excel¬ 
lent tax-supported school system; he also favors legislation 
aimed at the reduction of monopoly profits and unearned gains; 
he stands for restriction of immigration, for measures improving 
the health and stamina of the race, and for the conservation of 
natural and human resources. The liberal holds that progress 
comes as the result of individual betterment rather than through 
mass or collective activity and rigid governmental regulations.^ 

Conservatism. Roughly speaking, a conservative is one who 
is satisfied with things as they are. The conservative is usually 
a fairly successful individual or one whose position and income 
would be threatened by considerable changes in the political 
and economic world. The ultra-radical, whether of the individ¬ 
ualistic or the collectivist type, is normally one who has little or 
nothing to lose by revolutionary changes, and who believes 
that as a consequence he and his group may benefit greatly. 
The poor, the beaten, and the disgruntled swell the ranks of the 
radicals; the prosperous, the successful, and the contented com¬ 
prise a large percentage of the conservative element. Individuals 
may shift from one group to another with changes in their per¬ 
sonal fortunes. One fairly ‘‘sure-fire” plan for reducing radical¬ 
ism would be to provide each radical with a steady job and a 
little property. 

Progressivism. The sociologists and social workers insist 
that human society is very complex; consequently, no nicely 
worked-out, single-track program will build a Utopia. They 
also insist that law and order obtain in the world of social and 
political relations as well as in the physical realm. The problem 

^ See Carver, T. N., Principles of National Economy, Ch. 56. 


PROPOSALS FOR ECONOMIC REFORM 


353 


is to find methods and formulas which work with, and not 
against, the forces operating within the realm of social mechan¬ 
ics. The progressives would improve human relations by adopt¬ 
ing a step-by-step, multilateral program which would bring 
about social betterment, particularly for the masses, without 
revolutionary changes in the present order. A systematic pro¬ 
gram for industrial and social betterment would include plans 
(1) for the elimination of great inequalities in wealth and in¬ 
come and the ushering in of an approximation to equality of 
opportunity, (2) for the reduction of human waste because of 
sickness, premature death, and accident, (3) for an increase in 
the national and world output of desirable commodities and 
services, (4) for the improvement of educational facilities, 
(5) for providing wholesome recreation and increased leisure 
for all, and (6) for the reduction of unemployment and for in¬ 
creasing the regularity of industrial operation. ^ 

A Program for Industrial Coordination. The exigencies of the 
World War clearly disclosed to the leaders of American govern¬ 
mental and industrial organizations that our highly individual¬ 
istic business economy operated in an inefficient and wasteful 
fashion. The lack of coordinated and harmonious effort became 
painfully apparent. ‘^Face to face with a world crisis of unprece¬ 
dented dimensions, it could be discerned clearly that the prime 
industrial need was an uninterrupted flow of materials essential 
to the conduct of the war and to the efficiency of the civilian 
working population. The policy of laissez faire was quickly and 
unceremoniously relegated to the scrap heap; industrial mobiliza¬ 
tion became the order of the day. The great third party—the 
public—acting through its agency, the federal government, 
found it necessary, as never before in this country, to intervene 
in industry and to direct business affairs for the purpose of re¬ 
ducing friction and lost motion in the business world.” ^ In the 
confusion following the conclusion of the World War and in 
the speculative era which culminated in the stock-market slump 
of the autumn of 1929, the lessons of the War period were neg¬ 
lected. But, as we are coming out of the depression of 1929- 

1 See Carlton, F. T., Elementary Economics, p. 206. 

2 Carlton, F. T., Organized Labor in American History, pp. 282-28d. 


354 


ECONOMICS 


1931, our attention is again directed toward the desirability of 
eliminating jerky methods of doing business, toward the possi¬ 
bility of preventing over-development of industries because of 
the optimism and lack of vision on the part of industrial lead¬ 
ers, and toward plans for increasing coordination in business 
activities throughout the nation. 

It seems not impossible that within one or two decades, the 
American people will adopt certain policies looking toward the 
coordinating and integrating of American industries. A well- 
organized factory now coordinates the work and output of 
different departments within the plant. Should not similar 
steps be taken within the nation, considered as the United 
States of America, Incorporated, engaged in the gigantic busi¬ 
ness of supplying the wants of over 122 millions of people? Is 
not a governor needed to regulate and synchronize the economic 
engine operated by the American people? Fairly conservative 
opinion is demanding an “Economic General Staffand an 
“Institute of Industrial Coordination.” In the case of the rail¬ 
ways, considerable control is exercised over the investment pro¬ 
gram of a particular road. Allocation of investment funds 
through the action of governmental and banking authorities 
may not be far distant. Indeed, along this path may he the 
possibility of protecting capitalism from the assaults of the 
Bolshevists and other ultra-radicals. 

State Socialism. The advocates of state socialism desire an 
extension of the powers of governmental authorities in regard 
to the ownership and operation of business enterprises. They 
favor the governmental operation of an increasing number of 
public utilities. The operation of the mint and the post office by 
the federal government and of water plants by municipalities 
are steps leading toward state socialism. Many men who may 
fairly be classified as conservatives are not opposed to a reason¬ 
able extension of state socialism. 

Guild Sociahsm. Under guild socialism the government 
would own many industries but the control of each industry 
would be placed in the hands of the workers in that industry. 
The workers of all types would be active partners in the business; 
the government would be an inactive partner possessing the 


PROPOSALS FOR ECONOMIC REFORM 


355 


rights of ownership. Under state socialism governmental officials 
would assume, under statute laws, the direction and control of 
enterprises owned by the state, but, under guild socialism, the 
workers collectively would assume those functions. Under an¬ 
archism, and presumably under syndicalism, the political state 
would disappear, but under guild socialism it would remain 
as a distributor of functions between the guilds and organ¬ 
izations of consumers.^ 

Marxian Socialism. Marxian, or scientific, socialism is the 
most significant form of socialism. The socialists maintain that 
the private receipt of rent, interest, and profit (above wages of 
management) is unjust. They agree with the single taxers in 
regard to rent, but differ fundamentally as to interest and profits. 
The socialists assert that under the capitalistic system, the 
many are exploited in the interest of a few. Wage workers pro¬ 
duce more than they receive in wages; the remainder goes to the 
owners of land and capital in the form of rent, interest, and 
profits. The socialists would have the government take over all 
public utilities and other large industries, and operate them in 
the interest of the community. They do not believe in equality 
of wealth and income, but they do stress equality of opportunity. 
With equality of opportunity, the socialists assert, great in¬ 
equalities in income and wealth would disappear. Socialists 
believe that business competition is very wasteful. They would 
strengthen, rather than weaken, the functions of government. 
The followers of Marx believe that socialism will, in the normal 
course of events, displace the present order. 

Marxian socialism made its appearance in the United States 
soon after the Civil War. In the seventies a political party, 
called the Socialist Labor party, was organized. In 1879 a local 
group of the party elected three aldermen in Chicago. In 1896 
the Socialist Labor party candidate for president polled over 
36,000 votes. In 1900 a split developed and the Socialist party 
came on the stage. The latter has been more successful than the 
Socialist Labor party. The votes cast for the Socialist party 
candidates at different presidential elections are approximately 
as follows: 

1 Ely, R. T., Outlines of Economics (5th ed.), p. 726. 


356 


ECONOMICS 


1900 

96,000 

1904 

402,000 

1908 

421,000 

1912 

897,000 

1916 

590,000 

1920 

920,000 

1924 

joined with the La FoUette group 

1928 

268,000 


The vote cast in 1928 was less than three-fourths of 1 per cent 
of the total vote. In that year only 21,000 votes were cast for 
the Socialist Labor ticket. 

When the United States entered the World War in 1917, the 
Socialist party, following the traditional attitude of the social¬ 
ists, adhered to an anti-war program. A considerable group of 
prominent socialists left the party declaring that it was pro- 
German. In 1919 a radical revolutionary faction also left the 
party. These radicals formed the nucleus of what is now 
called the Workers’ (Communist) party. The Socialist party 
in the United States is at present composed of somewhat con¬ 
servative radicals who hope to end the capitaUst order by 
political and evolutionary means. 

Utopian Socialism. The Utopian socialist is practically an 
historical figure only. The typical Utopian socialist wished to 
form a communistic settlement in some out-of-the-way spot. 
In this settlement, property and the results of productive efforts 
would be shared equally, or according to merit or some other 
arbitrary standard. It was argued that human nature was the 
product of environment. Place individuals in an environment 
in which business competition and the struggle for wealth were 
eliminated, and very soon selfishness and other unlovely traits 
would be sloughed off. It was further asserted that as soon as 
the success of the communistic settlements became assured, the 
outside world would hasten to take the necessary steps for the 
adoption of the program of the Utopian socialists. In short, it 
was urged that human nature was easily modified and that men 
and women were creatures controlled by rational motives. 

The Utopian socialist fiourished before the days of the psy¬ 
chologist. We are now convinced that human nature is not 


PROPOSALS FOR ECONOMIC REFORM 


357 


easily modified, and that a very large percentage of our actions 
and decisions are not the result of reasoning. We are dominated 
in a large measure by irrational motives, inherited impulses, and 
acquired likes and dislikes which membership in a settlement 
would not easily erase. Many communistic settlements were or¬ 
ganized in the United States between 1825 and 1860, but all not 
primarily of a religious nature were soon registered as failures. 

Bolshevism. The Bolshevists are the “ adherents of the 
majority.” The socialist movement in Russia was split into two 
wings before the opening of the World War. The Bolshevists 
represented the radical wing of the movement. In 1917, after 
the overthrow of the Czar, they were able to displace a more 
moderate socialist government. The Bolshevists claim to be 
followers of Marx. According to the Marxian theory, Russia was 
not, however, ripe for a revolution ushering in socialism. Only 
countries far advanced industrially were ready for the social 
revolution. Russia was, and is, predominately a rural and 
agricultural, not an urban and industrial, nation. The propriety 
of classifying Bolshevism as Marxian socialism seems doubtful. 
It is difficult for Americans properly to appraise the character 
and achievements of the Bolshevists who have now controlled 
Russia for over a decade. It is governed by a “dictatorship of 
the proletariat.” Democracy and majority rule have been dis¬ 
carded. For the autocratic rule of the Czars has apparently 
been substituted that of a group of representatives of the urban 
workers of Russia. For the terrorism of one class has been sub¬ 
stituted that of another. In attempting to bring order out of 
chaos in Russia, the Bolshevists have struggled against power¬ 
ful obstacles. The country had been despotically ruled for gen¬ 
erations, the World War had greatly weakened the nation, the 
outside world has been antagonistic, and the peasants and other 
groups within the nation have not been in sympathy with many 
of the economic principles and policies of the Bolshevists. 

Under Bolshevism, as unfolding in Russia, individual enter¬ 
prise and initiative are repressed as uneconomic and wasteful. 
A collectivist or communist regime is the aim. A great commu¬ 
nist experiment is being undertaken. The Bolshevist proposes 
“to unify the economic forces of a nation into a coordinate 


358 


ECONOMICS 


whole, which would permit the productive process to be con¬ 
ducted according to a general plan, carefully worked out in 
advance, and directed by the authorities of the socialistic 
state.” 1 The integration of industry and of industrial manage¬ 
ment is being attempted on a colossal scale. The plan is to put 
practically all of the industries of a nation, larger in area and in 
population than the United States, into the hands of govern¬ 
mental authorities. It is a '‘challenge to the capitalistic faith 
in the ultimate harmony of confused individual interests and 
unknown social purposes.” ^ The Russian Bolshevists are insist¬ 
ing that the right to satisfy their economic appetites should be 
withheld from individuals in the interest of the community or 
the state. The coercive powers of Soviet Russia are being used 
to force recalcitrant persons to cooperate under this planned 
economy. Russian workers are “fighters on the economic front.” 
They are to be partially paid “in glory.” The opponents of the 
Bolshevistic regime assert that “forced labor” is employed in 
Russia. Soviet Russia does not return to the worker in wages 
“the full product of his labor,” as the socialist formula requires. 

The Bolshevist group is imbued with the missionary spirit. 
The leaders of the Russian Soviet state hope to see the spread 
of the Soviet organization to other countries. Bolshevism is 
seeking an earthly paradise, and is willing to use compulsion 
and terrorism in order to accomplish its purpose. Freedom for 
the individual is not desired. Bolshevism runs directly counter 
to liberalism and individualism. In the United States a small, 
but vociferous, group marches under the Russian banner. In 
1921 the Workers^ (Communist) party was organized. In the 
presidential election of 1924 its adherents cast over 36,000 
votes, and, in 1928, over 48,000. Unlike the American syndical¬ 
ists—the Industrial Workers of the World—this faction of 
radicals does not attempt to organize a separate type of labor 
organization. They propose to “bore from within” the ortho¬ 
dox unions of the American Federation of Labor. However, in 
recent years, the Workers’ party has attempted to organize dual 
unions. 

^ Bye, R. T., American Economic Review, Sup., March, 1929, p. 91. 

2 Lorwin, L., ibid., p. 120. 


PROPOSALS FOR ECONOMIC REFORM 


359 


Communism. Today communism means not only the owner¬ 
ship and operation of industry in a collective fashion, but also 
the division, equal or otherwise, of the products of productive 
efforts—consumption goods—among the members of the com¬ 
munistic group. The Bolshevists of Russia are near-communists. 
The Utopian socialists, who organized settlements, usually 
accepted the communistic doctrine of community control and 
distribution of consumption goods. 

Questions 

1. Distinguish between the different reform programs outlined in this 
chapter. 

2. What is a “reform^’? 


References 

Boucke, 0. F., The Limits of Socialism. 

Bye, R. T., and others, American Economic Review, Supplement, 
March, 1929. 

Carlton, F. T., Organized Labor in American History, Ch. 5. 

Curtis, R. E., Economics: Principles and Interpretation, Pt. 10. 

Edie, Lionel D., Economics: Principles and Problems, Chs. 26 and 27. 
Ely, R. T., et al.. Outlines of Economics (5th ed.), Ch. 33. 
Fulop-Miller, Rene, Mind and Face of Bolshevism. 

Hoover, C. B., in Harper’s Magazine, October, 1930. 


CHAPTER XXXIV 


THE PRESENT TREND 

Adaptation to New Conditions. By centering the attention 
especially upon points presented in the first six chapters, we may 
be able to catch a ghmpse of the general direction of progress in 
the United States. Nothing seems to be constant except the 
tendency to change. The unusual of one period becomes the 
usual of the next. In attempting to understand the present, it 
must be recalled that the machine and mass production are 
epoch-making in their effect upon industrial and social life. The 
functions of the home have been reduced by the coming of the 
machine and the factory. It is no longer a center of industry or 
of recreational activities. Income-making is now carried on al¬ 
most entirely apart from the home. The machine makes certain 
human traits desirable toward which a more primitive civiliza¬ 
tion was indifferent. The machine demands accuracy, punctual¬ 
ity, regularity, sobriety, and willingness to do teamwork. These 
were traits of fittle import in the pre-machine age. On the other 
hand, frugality and obedience to authority are being pushed into 
the background by the upheaval of the machine age. The power- 
driven machine, unless negatived by scanty resources and dense 
populations, ushers a people into a position from which a land 
of plenty for all can be discerned. It is now possible in the 
United States to produce a sufficiency for a reasonable standard 
of living for all in a short working day and to provide all workers 
with fairly comfortable and safe workplaces. 

The chief task of colonial and pioneer Americans was the 
great adventure of subduing a continent. This job required 
vigor, individual initiative, and independent action. System, 
methodical planning, and scientific determination were of the 
future. Rough and ready or rule-of-thumb methods and luck 
were depended upon to get one over the hard places. Our herit¬ 
age and the prestige of the pioneer tradition led Americans to 

360 


THE PRESENT TREND 


361 


emphasize personal liberty and the rights of the individual. 
Today’s America, with its giant factories and huge transporta¬ 
tion systems, its specialization, and its interdependence, is 
ruthlessly pushing us into a new world. Organization, scientific 
management, regularization, accuracy, and teamwork are in¬ 
dustrial requirements in the new and up-to-date business es¬ 
tablishments. A newspaper editor with characteristic punch and 
exaggeration writes: “Our technology is of 1930 model; our 
institutions are, many of them, of B.C. vintage, with few of 
them even of nineteenth century origin.” 

Political and ethical controversies mirror the new situation. 
The traditional American ideals and practices crystallized dur¬ 
ing the big westward movement of the colonists and early 
settlers are feeling the stress of the new day. The growing or 
adjustment pains are sharp. Germany is much more highly 
organized, and the German people are more accustomed to dis¬ 
ciplinary control. There has been less of objection in Germany 
to regulation in the interests of efficiency and system than in the 
United States with its recent background of pioneer life. Under 
the earlier American dispensation truth was supposed to fall 
from the lips of those in authority; the machine and science 
insist that knowledge of facts and forces is the key to the exer¬ 
cise of authority. Authority is only recognized by a generation 
subjected to the discipline of a machine age when it rests on the 
basis of harmony with the findings of science. 

The machine and mass production are rapidly wearing away 
many of the old crusts of tradition and of ethical ideas. Like a 
river as it cuts its way through hard rock in finding an outlet to 
the sea, the ceaseless pressure of new ways of doing things and 
of Hving are slowly wearing down traditional ideas and pro¬ 
grams. Engineers with dynamite, dredges, and steam shovels 
can do a much quicker and a more efficient, if less picturesque, 
job in making a river channel than can the river left to its own 
devices for overcoming resistance. In like manner, sociologists 
believe that legislation, directed public opinion, and education 
may help in quickly and effectively reducing the opposition to 
new ideals and new methods and in adapting a people to a 
strange economic and social environment. In an age of rapid 


362 


ECONOMICS 


technological progress, social adjustment must be rapid or dis¬ 
aster will overtake civilization. 

Since the World War men in Europe and in the United States 
have awakened to the necessity of changing organizations, 
plants, and methods to meet new situations. The next thing 
should be the training of men with open, not closed, minds. We 
need leaders and followers with open and alert minds ready to 
anticipate changing conditions. Blind adherence to tradition 
and custom will spell disaster in the next decades. Adaptability 
and versatility are important virtues m a world undergoing 
kaleidoscopic transformation within the compass of a genera¬ 
tion. Earlier civilizations began to slip and vanished without 
understanding the reasons for decay and fall. The scientific 
attainments of today should enable us to make a diagnosis of 
the forces making for progress and for decay. 

However, in the political and social spheres, we are about in 
the position that the Middle Ages were in regard to physical 
science. A large and possibly increasing number of the popula¬ 
tion are afraid of new ideas and of new points of view. They 
prefer traditional authority to the disturbing but trustworthy 
disclosures of science. In the words of a well-known economist 
and statistician, “Reason, however, has little to do in determin¬ 
ing and governing our actions and in the evolution of institu¬ 
tions. The present industrial organization seems to be quite 
unreasonable in its structure and functioning, and it may well 
be that unreasonable measures are needed to set it right.’’ ^ 
The United States is less hampered by inertia and tradition 
than are Europe and Asia, and it may be less difficult in this 
country to apply reasonable measures for modifying the eco¬ 
nomic and social structure of society. Nevertheless, the greater 
individualism displayed here may prove to be an obstacle in the 
path of social adjustment. 

It has been well said that “the greatest invention of the nine¬ 
teenth century was the invention of the method of invention.” 
This step was taken in the realm of the physical. The twentieth 
century bids fair to push this method into the economic and 
pohtical world. Indeed, it may not be extravagant to insist that 

1 Meeker, Royal, Harvard Business Review, July,;,1930, pp. 393-394. 


THE PRESENT TREND 


363 


it must be done or civilization will be submerged by the uncon¬ 
trolled forces liberated by technical advance. The revolution 
wrought by the power-driven machine, by science, and by in¬ 
vention has by no means reached its limit. The problem is not 
that of staying the hand of science and of machinery; it is that 
of bringing social institutions and programs into line v/ith 
physical and chemical progress. The history of civilization in¬ 
dicates that too rapid development in the material realm is 
usually followed by a backward movement. In the words of 
a student of history, ^^The rapidity with which our present 
civilization has been rising leads to the suspicion that this 
danger peak is being approached.” Our problem is to avoid 
a new Dark Age. 

Many of our troubles today are centered around the problem 
of keeping our complex industrial machinery in steady opera¬ 
tion and properly directed. It has been suggested that the 
Roman Empire declined and split into fragments because it 
became too large and too complex for the intellects of the period 
to direct effectively. Is political and industrial America face to 
face with a similar dilemma? The student of science and of 
engineering is inclined to answer in the negative. However, 
merely being optimistic does not cure the ills of maladjustment 
and of unemployment. American industry is complex and it is 
not well coordinated. It is like a football team without a leader 
or coordinator. Whether we like it or not, industry, if it is to be 
efficient, must be organized with greater unity. 

The United States of America should be thought of as a great 
organization for the production of food, clothing, and shelter 
plus comforts for its 122 millions of people. It needs unification. 
The states gave up complete independence in the interests of 
the entire nation; for efficiency, industries hitherto independent 
must submit to coordinating control. We are all workers, 
managers, and investors—units in a great machine, the business 
world. Extreme individualism is out of date. The engineer, 
science, and invention have made it out of date. Progress under 
capitalism demands that Americans organize industry on a 
national scale. The prevention of duplication, overlapping, and 
overinvestment in certain fields is a prime requisite for a program 


364 


ECONOMICS 


of unemployment reduction. Production and consumption 
should be geared together. If capitalism is unable to achieve 
greater harmony in industrial America and reduce the lost 
motion called unemployment, we must be prepared for a rising 
tide of communist propaganda and sentiment. 

Changes in Governmental Structure. Much of our govern¬ 
mental machinery was developed in the pioneer period of our 
history. It is adapted to a community of relatively scanty 
population, to bad roads, and to small-scale industry. It was 
evolved before the railway, the telephone, the automobile, 
mass production, and extreme heterogeneity of population. The 
city-manager plan of municipal government represents one 
hopeful movement in the field of urban control toward placing 
the technical and clerical affairs of government in the hands of 
the chosen for other reasons than political expediency. County 
and state governments in the United States are still in actual 
practice about as they were in the pioneer stage. In many of 
the states taxes are levied according to plans formulated during 
the pre-machine era of our history. Adjustment is sadly needed 
in the governmental machinery of American states and counties. 
National government has progressed measurably, but we con¬ 
tinue to allow thirteen months to elapse between the election of 
a Congress and its getting down to regular business, because 
roads were bad, communication slow, and bridges lacking in 
1789—a clear case of control by the dead hand. The federal 
government is, however, reaching beyond its traditional func¬ 
tions. It is becoming a gatherer, an analyzer, and a publisher of 
information regarding business and social conditions. It is 
building the foundations for intelligent direction of business. 
The federal government, through the Interstate Commerce 
Commission and the Federal Trade Commission, is exercising a 
regulatory power which was not anticipated by the founders of 
our government. Furthermore, the federal government is a very 
important employer of labor. May we not expect it to point the 
way toward excellence in labor management? 

Labor and the New Day. The revolutionary changes in 
industry which have been outlined lead inevitably to the sugges¬ 
tion that labor organizations should begin to study their pur- 


THE PRESENT TREND 


365 


poses and programs anew. Since science and research are chang¬ 
ing business methods and attitudes, science and research should 
be increasingly used by labor organizations as a basis of a pro¬ 
gram of industrial relations and bargaining which will square 
with a new and shifting industrial status. 

The conservative American labor organization of today traces 
its origin to the time in which individualism was supreme, to a 
time preceding the development of mass production. Like all 
other groups, a labor organization is subject to social inertia. 
Its constitution and by-laws, its traditions, the vested interests 
of its officials, and other conditions make adjustment on its part 
to a new and changing industrial world very difficult. American 
labor organizations are today out of step with industry. They 
are organized mainly as trade or craft unions; they have been 
thrust into an epoch in which craft Hnes are becoming less and 
less sharp and distinct. To an outside observer it seems that 
too many labor leaders are old in years and are content to 
think in terms of the days before mass production. They ap¬ 
pear to lack the ability or the wUl to make adjustments to 
the new. 

The Big Problems Confronting Industry. There are two big 
problems, accompanied by other subsidiary and interwoven ones 
which the leaders of today’s industrial and political life are called 
upon to tackle: (1) How may unemplo 3 mient be reduced, and 
(2) How may dire poverty be eliminated? In an attack upon 
these questions blind optimism, oratory, or appeal to the emo¬ 
tions in any form is practically useless. The application of 
scientific principles in a manner similar to that used in the 
physical sciences is essential. 

In order to make a direct and effective attack on these two 
related problems, it is suggested that the following steps are 
among those feasible and desirable. (1) Smooth out the business 
cycle appreciably. (2) Regularize industry to an extent as yet 
reached only in a few encouraging cases. (3) Find for workers 
displaced by machines or new methods other suitable jobs; 
shorten the working day or week; pay a dismissal wage or give 
unemplo 5 mient insurance; or make the change so slowly as to 
keep those now employed on the job until they leave of their 


366 


ECONOMICS 


own volition, are retired on a pension, or are removed by death. 
(4) Stabilize the value of the monetary unit—the dollar—so as 
to eliminate the so-called “dance of the dollar.” (5) Broaden 
the scope of social insurance in the United States. (6) Apply 
scientific principles to a study of the methods of marketing 
goods. Successful mass production will be balanced by mass 
consumption of goods. (7) In order to increase output, discover 
a way of rewarding producers well rather than rewarding shrewd 
bargainers highly—as is now too frequently the case. In other 
words, develop a program which will render it increasingly 
necessary in many industries to make goods, and goods of a 
reasonably good quality, in order to make profits. (8) A marked 
change in management methods is essential to efficiency in pro¬ 
duction. Absolutism in industry, like absolutism in government, 
is gradually giving place to a more democratic program. In the 
words of another, an up-to-date business organization “is coming 
to be conceived less in terms of an autocracy, wherein all power 
and initiative come down from the top, and more as a coopera¬ 
tive enterprise wherein functions of management may be exer¬ 
cised all the way down the line.” ^ 

It seems appropriate to close this brief analysis of the present 
industrial order by alluding to the views of a capable student of 
our industrial age. We are told that industry in America is 
“coming of age.” According to Tugwell, the following condi¬ 
tions are essential for the attainment of maturity in industry: 
“(1) the need to socialize industry, which means to make it 
serve social ends rather than individual ones; (2) the need to 
reconstruct industry so as to take advantage of good incentives 
rather than bad ones in the interest of a better moral world; 
(3) the need for such a growth of industiy as will give us the 
material basis of life which will enable us to function at our best 
efficiency.” ^ 

Questions 

1. Our industrial machinery is very complex. Explain. 

2. Give examples of social and industrial maladjustment. 

* Soule, G., The Useful Art of Economics, pp. 215-216. 

2 Industry's Coming of Age, p. 231. 


THE PRESENT TREND 


367 


3. What are three of the important industrial changes of the last 
decade? 

4. What is meant by “absolutism in industry’7 

5. What do you understand by the statement: Industry is “coming 
of age ^7 

References 

Beard, C. A., Toward Civilization. 

Soule, George, The Useful Art of Economics^ Chs. 10 and 11. 

Taylor, H., Making Goods and Making Money. 

Tugwell, R. G., Industry’s Coming of Age, 



INDEX 


Ability to pay taxes, 338,340, 343. 

Acceptances, 172-173. 

Administrative officials, 319. 

Advertising, 62, 63, 66, 80, 81, 87, 
90-93, 96, 97. 

American Federation of Labor, 
119, 273-275. 

Arbitration, 277, 294. 

Assessment, special, 337. 

Automotive industry, 17, 38, 88, 

96, 130, 145, 200-201, 202. 

Aykes, Leonakd, 202. 

Babson, R. W., 42, 157. 

Balance of trade, 220-222. 

Balance sheet of a corporation, 
143-145, 170-171. 

Baltimore and Ohio Railway 
plan, 277, 283, 285. 

Bank manufactures credit, 169, 
171, 172. 

Bank reserves, 172, 174, 176. 

Barter, inconveniences of, 162. 

Basset, W. R., 66. 

Bell, A. G., 207. 

Boycott, 276, 277. 

Branch plants, 130. 

Bruere, R. W., 206. 

Business, 12, 16, 17, 28, 32, 46,47, 

49, 52-55, 79, 94, 125, 235, 313. 

Business administration, schools 
of, 58. 

Business philosophy, a new, 150. 

Businesses affected with public 
interest, 34, 192, 199, 204, 210, 
211 . 

Buying, hand-to-mouth, 201-202. 

Calder, John, 118. 

Carver, T. N., 5, 87. 

369 


City expenditures, 329, 330, 331. 
City life, modern, 261. 
Civihzation, 13, 20, 40, 49, 363. 
Clay, Henry, 226, 231. 

Clearing house, 177. 

Cleveland, President, 231. 
Combination, horizontal, 156. 
Combination, vertical, 156. 
Commons, John R., 282. 
Competition, unfair, 81, 159-160. 
Contract, freedom of, 318. 
Control by the dead hand, 364. 
Cooperative societies, 98. 
Cooperative stores, 97. 
Coordination, industrial, 45, 354, 
363. 

Corporation, holding, 143, 149, 
158. 

Crime waves, 241. 

Day, length of the working, 43. 
Depressions, 235, 236, 242, 244. 
Disease, industrial, 322. 

East, E. M., 259. 

Edie, L. D., 63. 

Electric light and power plants, 
growth of, 205-206. 

Electric street railway, 207. 
Employers’ liability system, 321. 
Employment agencies, public, 
314, 325. 

Engineering, human, 48, 49, 291, 
292, 297. 

Engineer’s point of view, the, 33, 
136, 291. 

Expenses, danger of high fixed, 
194-195. 

Expert, the technical, 54, 212, 213. 
Expert advice, opposition to, 211. 


370 


INDEX 


Factory buildings, 134-135. 

Fee, 336. 

Filene, E. a., 314. 

Ford, Henry, 26, 52, 53, 95, 150. 
Frank, Glenn, 5, 35. 

Futures, sale of, 251, 252. 

Garfield, James A., 226. 

Gas lighting, early opposition to, 
205. 

George, Henry, 351. 

Hamilton, Alexander, 228, 230. 
Hancock, General, 229. 
Heredity, importance of, 264- 

265. 

Hobson, John A., 111. 

Home, functions of, 360. 

Hoover, President, 56. 

Immigration, 19, 261-264. 
Immigration, restriction of, 264- 

266. 

Immigration laws, 263-264. 
Income, national, 99, 122, 123. 
Inequality, 123. 

Inertia, mental and social, 46, 
264, 362, 365. 

Injunction, 56, 326. 

Installment selling, 88, 94, 97. 
Insurance, 106, 253-255. 
Interdependence, 11, 12, 35, 49, 
189, 236, 361. 

International borrowing, 100. 
Investments, diversification of, 
182, 184, 185. 

Johnson, A. S., 5. 

Kemmerer, E. W., 163. 

King, W. I., 121. 

Labor, American Federation of, 
119, 273-275. 

Labor power, sale of, 109. 


Labor societies, 270-271. 

Land reformers, 351. 

Land values, 101, 134, 351. 
Leacock, Stephen B., 115. 
Leadership in industry, 300, 301. 
Life, the good American, 72-73. 
List, Friedrich, 225. 

Living, cost of, 69-71, 112, 113- 
114. 

Local union, the, 271, 272. 

Malthus, T. R., 257, 258. 
Management, 16, 22, 26, 27, 31, 
35-37, 44, 46, 52, 55, 57, 69, 
104,150, 209, 237, 267, 286,288, 
293, 298, 301, 366. 
Management, scientific, 14,22,29, 
148, 287, 361. 

McKinley, President, 230. 
Mercantilists, the, 220. 
Middlemen, 86-87. 

Mitchell, W. C., 313. 

Mitten, T. E., 150, 300. 
Monopolist, the, 32, 107. 
Monopoly, 51, 81, 83-84, 209. 
Monopoly, profit, 105, 107, 212. 
Moore, Professor, 241. 

Nationalism, 227. 

Obsolescence, 96-97, 99, 246. 
Overhead expenses, 21-22, 79, 89, 
314. 

Over-production, 307. 

Parmelee, J. H., 202. 

Peace, industrial, 21, 117, 293- 
296, 300, 301. 

Pedagogy, 51. 

Personnel work, 292-294,297-300. 
Pioneer, the American, 10, 14, 
33, 81, 147, 236, 261, 360. 
Pittsburgh plus plan, 160. 

Police power of the state, 146, 
318, 319. 


INDEX 


371 


Pooling agreements, 154. 

Population, quality of, 260. 

Population and poverty, 257-258, 
260. 

Poverty, elimination of, 123, 365- 
366. 

Prestige, social, 62. 

Price, public, 337. 

Price system, the one-, 82. 

Primitive men, 9, 10, 14. 

Production, mass, 8, 10, 14, 16, 
17, 21, 22, 23, 33, 60, 93, 94- 
95, 287, 360, 361, 365, 366. 

Profits, pure, 105, 106. 

Progress, 63, 72. 

Promoter, the, 125. 

Property rights, 12, 199. 

Psychology, industrial, 48, 50, 

54, 299. 

Public operation, fitness for, 212. 

Pubhc ownership of utilities, 212, 
213. 

Public policy, contrary to, 318. 

Public works program, 244, 312. 

PuUman Company, the, 53. 

Race prejudice, 265. 

Rebates, railway, 196. 

Regularization of industry, 52, 
238, 307, 310, 361. 

Research, 22, 29-30, 45, 237, 365. 

Retailers, independent, 90. 

Revolution, new Industrial, 42, 
363. 

Revolution, the Industrial, 39, 
307. 

Ripley, W. Z., 193. 

Roosevelt, President, 158. 

Sabotage, 50, 56, 66, 275, 295. 

Salesmanship, 57, 62, 63, 66, 81, 
87, 90-91, 97, 303. 

Savings, 99, 100, 104, 123. 


Smith, Adam, 80, 81, 338. 
Speculation, 37, 46, 53, 55, 58, 
106, 148, 181, 237, 244, 246, 
247-249, 251, 351. 

Speculation, stock market, 187, 
249. 

Speculators, desirable functions 
of, 248, 249. 

Stabilization of the dollar, 313, 
366. 

Standardization, 44, 89, 95, 153, 
157. 

Stores, chain, 89, 90, 98, 130. 
Strike, 275-276, 277, 294. 

Style, 95. 

Tannenbaum, Frank, 114. 
Tariff Commission, the, 232, 233. 
Tariff revision downward, 229. 
Tax, 336, 337, 339, 351. 

Tax, classified property, 340. 

Tax, the single, 340, 350-351. 
Telephone industry, growth of 
the, 207. 

Thorp, W. L., 5. 

Trades’ union, the, 271. 

Tramp, the, 268. 

Trust, the real, 154-155. 
Tugwell, R. G., 366. 

Turnover, labor, 65, 148, 314-316. 
Turnover, stock, 148, 149. 

Unionism, business, 274. 
Unionism, strength and weak¬ 
ness of, 274. 

Wage, a dismissal, 309. 

Wage theories, 109-115, 286-289. 
Wages, real, 108, 109, 118, 287. 
Wages, sources of, 117, 287. 
Waste in Industry, Committee on 
EHmination of, 65, 66, 68. 
WiLLCOX, W. F., 259. 

Williams, Whiting, 306. 


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